Role of Money in Society

FUCNTIONS OF MONEY

As the word money is used in everyday conversation, it can mean many things, but to economists it has a very specific meaning. It is defined as anything that is generally accepted in payment for goods or services or in the repayment of debts. Certainly, money is considered as the most important financial asset which is commonly used in the economy. Cash or bills, coins and accounts at banks are considered as money. Whether money is currency or checking account, it has three primary functions in the economy: as a medium of exchange, a unit of account, and a store of value.

Firstly, in almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange or we can say it is used to pay for goods and services. The use of money as a medium of exchange promotes economic efficiency by eliminating much of the time spent in exchanging goods and services. In fact, without money the price of every goods and services that we want to trade would have to be expressed in terms of exchange ratios. Moreover, buyers and sellers need to have an exact coincidence of wants which means that we have to find a person who has the goods or services which we want and that person also wants the products that we have to offer, so we will be difficult and time consuming, and the time we waste on trying to exchange products is called a transactions cost. On the other hand, after the present of money in our economy, we can sell products that we have so as to get money; then we can use that money to buy products that we need. According to that, money support economic efficiency by reducing much of the time waste on exchanging goods or services and permits us to trade with each other uncomplicated.

The second role of money is to provide a unit of account which means that it is used to measure value in the economy. Normally, we measure the values of goods and services in terms of money. Imagine how hard it would be to shop in a supermarket with 1000 different items; deciding whether chicken or fish is cheaper would be very complex if the price of a pound of chicken were quoted as 4 pounds of butter and the price of a pound of fish were quoted as 8 pounds of tomatoes. So, in order to solve this problem, money has to be introduced into the economy and have all prices quoted in terms of units of money. Accordingly, we are able to quote the price of every product easily. Therefore, we can see that using money as a unit of account allows us to identify the price of products without difficulty and can reduce transactions cost in an economy by reducing the time spent on computing the price of products.

Finally, money also functions as a store of value. At this point, money is a storage area of purchasing power over time. A store of value is used to save purchasing power from the time income is received until the right time it is spent. This function of money is useful because most of us do not want to spend our income immediately upon receiving it but rather prefer to wait until we have the time or the desire to spend it. Apart from money, other assets such as bonds, land, houses can be used as the store of value as well. In fact, money is not always the best store of value, but it is the only perfectly liquid asset in the financial system because it doesn’t need to be converted into any other form in order to be spent.

In summary, money performs three important functions in the economy such as a medium of exchange, a unit of account, and a store of value. It not only eliminates a large amount of transactions cost and permits us to express the prices of all products in term of monetary unit, but also saves purchasing power from the time which income is received until the time that we desire to spend. Hence, money is very essential for our everyday life and economy due to its three essential functions.

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