The functions of money

The roles which money plays in an economy are:
• A medium of exchange. This is the most important function of money. Suppliers of factors of production receive money and then use this money to purchase the goods and services which they require. It obviates the need for a barter system.
• A store of value. This aspect of the role of money is facilitated because of the particular characteristics of money so that a time gap may exist between the receipt of money and its use. It is this quality of money which enables people to save for their old age or for future purchases. However, inflation particularly lessens the usefulness of money for this purpose.
• A measure of value/unit of account. Money is the common denominator by which we measure and express value.
• A standard of deferred payment. This means that it is possible to express, in money terms, the price which must be paid at some future date. This feature of money makes possible credit trading and the drawing up of financial contracts.



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