Function of money

Money has three basic functions. It serves as a medium of exchange, as a measure of relative value, and as a store of value.

As a medium of exchange, money enables two individuals to exchange without having to barter; that is the carpenter doesn't have to build a step for the grocer every time he wants a carton of milk. The carpenter can build steps or anything else for anybody, receive money for his services, and use money to purchase milk from the grocer. The grocer can in turn use the money received from the carpenter and others to purchase a suit from the tailor.

As a measure of relative value, money allows two dissimilar items to be purchased on similar bases. It is in terms of money that we think of value. How many cartons of milk should the grocer pay for a suit? If asked that question, you might ask, how much is a carton of milk worth? And how much is the suit worth? You would want to define the exchange in terms of the relative value of the two items and would use the value in dollars (money) to determine how many cartons of milk it should take to buy a suit. Money helps to think of different things in terms of a common value base. As a store of value, money makes it possible for us to hold onto the value over time. If the grocer would have to hold the value of his milk in milk, he could not do it for long because it would spoil. If he sells the milk and gets money for it, he can hold the money until he wishes to purchase something.

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A global view of finance	\|	ACCOUNTING AND BOOKKEEPING

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