MONEY AND INFLATION — Economics STD 12 Commerce — Question
Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsMONEY AND INFLATION3 Marks
Question
Define money and explain its functions in brief. What is money? State its functions.
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Answer
$1.$ Introduction:
As Socio-Economic life of human beings become more and more complicated, barter system was proved to be ineffective and then money was introduced and universally accepted.
$2.$ Meaning of Money:
Different economist have given different definitions of money which are as under:
According to Marshall "Money is that medium which is used as a means of exchange without any doubt or investigation regardless of time or place".
According to Robertson money as “what is accepted universally in exchange of goods or service."
According to J.L.Herdson "Anything which is medium of exchange and widely accepted universally" So, there are various definitions explained functions of money.
$3.$ Functions of Money:
Functions of money are as under:
$(1)$ Medium of Exchange:
The most important function of money is to act as a medium of exchange.
Through money our monetary transactions become easy and simple.
The problem which was faced during barter system like double coincidence of wants between two individuals that got solved due to invention of money.
Due to invention of money the individual can produce the goods and can sell it and get money in return.
By giving money we can buy goods and this way the transaction by money becomes easy and smooth.
E.g. A farmer can get money in exchange of wheat and then from that money he can buy clothes, rice, ghee, shoes, furniture etc.
Due to invention of money, the drawback of barter system is solved.
Small or large transactions can be easily done.
Costly or cheaper goods can be easily sold & purchase.
An individual can sell the goods and get money in return and do savings for future need of goods and services savings.
An individual can also satisfy his wants.
$(2)$ Store of value:
Another important function of money is that it also acts as a store of value. Under barter system, it is difficult to store value.
In the absence of money the individuals have to store wealth $($in the forms of assets, grains etc.$)$
The value of store commodities may change in the due course of time.
These goods may perish after sometime.
Secondly it is very expensive to store specific goods for long time.
Money can be stored it can be saved, used at the time of difficulties.
There is no extra cost for saving money and it is safe in bank.
Another advantage of using money as it can be used as a standard of deferred payment.
This characteristic of money is important for the entire system of credit, hire-purchase and installment payments.
$(3)$ Measure of value:
Money plays an important role as a measure of value.
In barter economy, it was difficult to remember the exchange rates and values of goods and services for $20 \ kg$ of wheat equal to how much kg of rice?
How much meter of cloths?
How much kg of Ghee? While, money makes this easier allowing the value of different goods or services can be compared and assessed with each other.
Through money, the decision for economic transactions can be taken faster.
Kilograms, meter and liter can be easily measured.
$(4)$ Other:
Money acts as the most liquid form of assets as it can be easily converted into goods and services.
Professor D.H. Robertson has rightly stated the functions of money as "Money is a matter of four functions; a medium, a measure, a standard and a store".
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