What are the main functions of money? How does money overcome the
shortcomings of a barter system?
The main functions of money are as follows:
1. Medium of exchange
Money acts as a medium of exchange as it facilitates exchange
through a common medium, i.e. currency. In other words, money
helps in the buying and selling of goods. For example, a person
can sell his goods to another for money and that person can use
money to purchase goods of his choice. Money solves the problem
of double coincidence of wants.
2. Unit of value
The values of goods can be measured in terms of money. It is a
common medium through which we can calculate the value of each
and every good. The value of a good in terms of money is called
the price. In barter system the lack of a common denominator for
measuring values of goods was a major drawback.
3. Store of value
This function explains the importance of money as value storage.
This implies that wealth in the form of money can be stored
easily as a medium of exchange for future use. For example, money
can be stored in banks for meeting emergency and future needs.
4. Standard of deferred payments
Payments can easily be made through the medium of money. In other
words, it is very difficult to pay back a loan in terms of goods
and services. However, with the advent of money the payments of
loans or interests can easily be made.
Money overcomes the shortcomings of barter system in the
1. Money solves the problem of double coincidence of wants. For
example, if a person needs wheat in exchange of tea, then he/she
must search for a person who is ready to trade wheat for tea.
Money made the need for such searches redundant.
2. In barter system, it was very difficult to measure the value
of one good in terms of another. For example, it is difficult to
calculate the value of a cow in terms of wheat.
3. It was very difficult to store goods, especially perishable
goods (fruits, meat, etc.) for the purpose of value storage.
Money serves this purpose.
4. The contractual or future payments are much difficult to be
made in barter system. For example, a worker working on contract
basis could not be paid in terms of rice or chairs.
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