Importance Of Money

Importance Of Money

A person holding money can easily exchange it for any commodity or service that he or she might want. Everyone prefers to receive payments in money and then exchange the money for things that they want.

DOUBLE COINCIDENCE OF WANTS:

Double coincidence of wants mean both parties i.e., the buyer and the seller have to agree to sell and buy each others commodities.

In a barter system where goods are directly exchanged without the use of money, double coincidence of want is an essential feature. In an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.

MONEY AS MEDIUM OF EXCHANGE:

Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

• Medium of exchange is an important function of money. It means that money acts as an intermediary for the goods and services in an exchange of transaction. Use of money as a medium of exchange has removed the major difficulty of double coincidence of wants in the barter system.
• The medium of exchange, function of money has classified all transactions on the basis of time and place. Now, the seller of goods need not sell his goods at a particular time and place and buy goods of the same value as well.
• The 'medium of exchange' function of money implies that money is generally acceptable by the people. They can buy goods and services they need using money. That is, money facilitates multilateral trade.
• Money also offers economic freedom to the people.

ROLE OF MONEY IN AN ECONOMY:

• Money plays an important role in the economy of a country. The use of money is at every step of life. In fact it would be hard to imagine life without money.
• The main function of money in an economic system is to facilitate the exchange of goods and services, i.e., to lessen the time and effect required to carry on trade.
• Without exchange of goods and services nobody can fulfill all his needs and requirements. Without money, exchange is not easy. Barter system has many problems.
• We are living in world, with a very large group of countries and their population. As the group becomes larger and larger, problems begin to emerge more and more with the barter system.
• Modern economies are highly specialized. There is specialization of firms, of business, of regions, of types of capital, etc. Such specialization allows the utilization of each person at the best of his or her ability and skill, each region to the maximum advantage, and the use of large amounts of specialized capital to reap economics of scale. The fruits of this are high standards of living and productivity. All this specialization will not be possible without an equal highly developed system of exchange and trade, i.e., the use of money
• Money serves the economy of the country performing the following four most important functions:
• A unit of value
• Medium of exchange
• A standard deferred payments and
• Store of value.