Functions of Money

Functions of Money?

Money performs three major functions. One of the most important functions of money is as a medium of exchange. This means that people accept money in exchange for goods and services. This greatly facilitates our trading labor and getting goods and services. Think back to the earlier example of a computer programmer wanting to buy bread. With money, the programmer does not need to find a baker who needs programming. He or she can exchange programming services for money, then take that money to any baker and get bread. The baker takes the money in exchange for bread because that money can be easily exchanged for anything he or she might want.
Another function of money is as a store of value. Money is a convenient way to save for the future. It is possible to store ones wealth without money, but it is nowhere near as easy. The computer programmer could, for example, trade some programming for some real estate, collectibles, or durable goods and hope that they hold their value over time. Money, however, is much more convenient. One reason is because of the liquidity property of money. This means that money is readily accepted as a means of payment. If you store your wealth by buying land, for example, it may be more difficult at some future time to find people who will take land in exchange for the goods that you want.
The third major function of money is as a unit of account. This means that money is used as a gauge of relative value. People can compare the value of goods and services in terms of money. As the saying goes, how can you compare apples with oranges Is an apple worth two oranges It might be hard to tell. However, if an apple sells for 50 cents and an orange sells for $1.00, then we can easily compare them in terms of their dollar value.


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