AMITY INTERNATIONAL SCHOOL, MAYUR VIHAR

SUBJECT: ECONOMICS
CLASS: XII
CHAPTER: MONEY FUNCTIONS (HANDOUT)
DATE: 8/07/24
LATEST ADDITION IN SYLLABUS
The functions of money can be broadly categorised under two heads:
A. Primary Functions (Main or Basic Functions)
B. Secondary Functions (Subsidiary or Derivative Functions)

A. Primary Functions
Primary functions include the most important functions of money, which it must perform in every country. These are:
(1) Medium of Exchange
Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and
services. It is the most essential function of money. Money has the quality of general acceptability. So, all exchanges take
place in terms of money.
(i) This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated
with the barter system.
(ii) Use of money allows purchase and sale to be conducted independently of one another.
(iii) This function of money facilitates trade and helps in conducting transactions in an economy.
(iv) Money has no power to satisfy human wants, but it commands power to purchase those things, which have utility to
satisfy human wants.
(2) Measure of Value (Unit of Value)
Money as a measure of value means that money works as a common denomination, in which values of all goods
and services are expressed.
(i) By reducing the value of all goods and services to a single unit (i.e. price), it becomes very easy to find out the exchange
ratios between them and comparing their prices.
(ii) This function facilitates maintenance of business accounts, which would be otherwise impossible.
(iii) Money helps in calculating relative prices of goods and services. Due to this reason, it is regarded as a ‘Unit of
Account'. For instance, 'Rupee' is the unit of account in India, 'Pound' in England and so on.
B. Secondary Functions
These refer to those functions of money which are supplementary to the primary functions. These functions are derived
from primary functions and, therefore, they are also known as 'Derivative Functions'.
The major secondary functions are:
(1) Standard of Deferred Payments
Money as a standard of deferred payments means that money acts as a 'standard' for payments, which are to be
made in future. Every day, millions of transactions take place in which payments are not made immediately. Money
encourages such transactions and helps in capital formation and economic development of the economy.
This function of money is significant because:
(i) Money as a standard of deferred payments has simplified the borrowing and lending operations.
(ii) It has led to the creation of financial institutions.

(2) Store of Value (Asset Function of Money)

Money as a store of value means that money can be used to transfer purchasing power from present to future.
Money is a way to store wealth. Although wealth can be stored in other forms also, money is the most economical and
convenient way. It provides security to individuals to meet contingencies, unpredictable emergencies and to pay future

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debts. Under barter system, it was difficult to use goods as a store of wealth due to perishable nature of some goods and
high cost of storage.
Money as store of value has the following advantages:
(i) Money is available in fractional denomination, ranging from Rs.1 to Rs. 1,000.
(ii) Money is easily portable. So, it is easy and economical to store money as its storage does not require much space.
(iii) Money has the merit of general acceptability. So, it can be easily exchanged for goods at all times.
(iv) Savings in terms of money are much more secured than in terms of goods.
(3) Transfer of Value
It means transferring the value of durable and immovable goods from one place to another. Through money,
anybody can sell his immovable property at any particular place and buy a property at some other place. This function
provides mobility to machinery, land and goods.

CBQS
Q. 1. Identify the function of money highlighted in the given statement.
(i) This function has led to capital formation and economic development of the economy.
(ii) This function has separated the acts of sale and purchase.
(iii) This function of money facilitates transfer of purchasing power from present to future.
(iv) It works as a common denomination, in which values of all goods and services are expressed.
(v) This function of money is also termed as 'Asset Function' of money.
(vi) This function has simplified the borrowing and lending operations.
(vii) This function helps to find out exchange ratios between various goods and services.
(viii) This function has removed the difficulty of lack of double coincidence of wants.
(ix) This function helps to make payments for all transactions of goods and services.
Ans. (i) Standard of deferred payments; (ii) Medium of exchange; (iii) Store of value; (iv) Measure of value; (v)
Store of value; (vi) Standard of deferred payments; (vii) Measure of value; (viii) Medium of exchange; (ix) Medium
of exchange.

Q. 2. How does money separate the acts of sale and purchase?

Ans. Under the barter exchange, there should be double coincidence of wants, i.e. barter system can work only when both
buyer and seller are ready to exchange each other's goods at the same point of time. However, such double coincidence
is very rare. With money as a medium of exchange, money can be used to make payments for all purchases and receive
money for all sales of goods and services. As a result, a person can buy or sell at different points of time with the help of
money. Hence, money has separated the acts of sale and purchase.

Q. 3. "Like money, goods also perform the function of store of value with same merits." Defend or refute.
Ans. The given statement is refuted. Although, goods can be stored for future, but money is the most economical and
convenient way. Money as a store of value helps people to transfer their purchasing power from present to future. Goods
do not perform the function of store of value because of following problems:
(i) Storage of goods requires time, money and efforts.
(ii) Goods do not possess durability and their quality deteriorates with passage of time.
(iii) They may not be as liquid as money, i.e. they might not be quickly converted into cash without loss of value

Q4. “Money has overcome the drawbacks of Barter System” Explain.

Ans. Barter system makes the exchange process very difficult and highly inefficient as Barter Exchange refers to exchange
of goods for goods. An economy, where there is a direct barter of goods and services, is called a 'Barter Economy' or 'C-
C Economy' (where C stands for commodity).
Barter System can work when there exists 'Double Coincidence of Wants'.
Double Coincidence of Wants refers to the simultaneous fulfilment of mutual wants of buyers and sellers.
Money has overcome the drawbacks of barter system in the following manner:
(i) Medium of Exchange
(ii) Measure of value (iii) Store of Value (iv) Standard of deferred payments (explain these)

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