Meaning and Functions of Money
1 Quick Explanation 1–3 min
Money is anything that is generally accepted as a medium of exchange.
It performs 4 classic functions: medium of exchange, measure of value, store of value, and standard of deferred payments.
2 Detailed Notes
Definition
Definition
Money is a medium of exchange which is generally acceptable, acts as a measure of value, a store of value and a standard of deferred payments. Money eliminates the double coincidence of wants.
Key idea
Functions
- Primary: Medium of exchange (buy/sell goods), Measure of value (common unit of account).
- Secondary: Store of value (wealth can be saved), Standard of deferred payments (credit/debt contracts).
- Contingent: basis of credit, distribution of income, maximisation of utility, liquidity.
Comparison
Money vs barter
| Basis | Barter | Money |
|---|---|---|
| Exchange | Goods for goods | Goods for money for goods |
| Double coincidence | Required | Not required |
| Store of value | Hard (perishable) | Easy (holds value) |
| Deferred payments | Difficult | Standardised |
Key points
Forms of money
- Commodity money → metallic money → paper money (fiat money) → bank money (demand deposits).
- Legal tender money (currency) vs non-legal tender (bank deposits).
Important
Why is money called fiat money?
Currency notes and coins derive value from the RBI's/Government's legal authority, not from their material. That's why it is 'fiat' (by order).
In One Minute
Money = generally acceptable medium of exchange with 4 functions (medium of exchange, measure of value, store of value, standard of deferred payments).
Important for Exam
- ⭐ 1-mark: definition of money.
- ⭐ 3-mark: functions of money with examples.
- ⭐ Why barter failed (absence of double coincidence of wants).
- ⭐ Money functions with real examples — prepare them.
Watch & Learn
Watch on YouTubeMeaning And Functions of Money - Money and Banking - Class 12 Macroeconomics 2022-23
by Magnet Brains
Why watch? Crisp definitions and examples for boards.
Open on YouTube Watch on YouTubeMeaning And Functions of Money - Money and Banking - Class 12 Macroeconomics 2022-23
by Magnet Brains
Why watch? Clear comparison with examples.
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