Money and Banking | Class 12 Economics Notes

3.1 FUNCTIONS OF MONEY

Money performs several essential functions in a modern economy. The foremost function is as a medium of exchange, which eliminates the difficulties of barter by providing a commonly accepted intermediary for transactions. This reduces the high costs and inefficiencies associated with searching for trading partners with matching needs. Money also acts as a unit of account, providing a common measure to express the value of goods and services. For example, stating that a wristwatch costs Rs 500 means it can be exchanged for 500 units of money (rupees). This allows calculation of relative prices, such as a pen costing Rs 10 being worth 5 pencils priced at Rs 2 each (10 ÷ 2 = 5). Similarly, the value of money itself can be expressed in terms of commodities; if prices rise generally, the purchasing power of money falls. Another important function is money as a store of value. Unlike perishable goods like rice, money is durable, easily stored, and universally accepted at any time, allowing individuals to save wealth for future use. However, for money to serve this function effectively, its value must remain stable; inflation erodes purchasing power. Other assets like gold or property can also store value but lack universal acceptability and liquidity. The chapter also discusses the move towards a cashless society, where digital transactions replace physical currency, supported by initiatives such as Jan Dhan accounts and Aadhar-enabled payment systems, enhancing financial inclusion in India.

📊 Diagram: See figure_1 and figure_2: 12105D63

🔗 Connection: Understanding the functions of money sets the stage for analyzing the demand and supply of money in the economy, discussed in the next section.