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What are the four importance of money?

Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment.

study.com - Four Functions of Money | Uses, Role & Standard of Money - Study.com

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What are the Functions of Money?

There are four main functions of money. The functions of money can also be referred to as the uses of money. These functions have a role to play in the economy. They include:

Money as a standard deferred payment

Deferred payments means that goods can be acquired now and paid for at a later date. Therefore, money acts as the best medium for deferring payments since it has a value that can be calculated with interest. This payment system has made money popular in the lending businesses as the money given out can be easily assigned a value and interest made in the process. Example: Mary wants to buy a car but cannot raise the full amount for purchase. She takes a loan from a lender and is then able to buy the car. The payments of the loan are deferred into the future while she keeps using her purchase (the car).

Money is used as a store of value

Money has the ability to retain its purchasing power into the future. This means that money has the ability to keep wealth in a form so that it can be readily available to spend in the future. However, this can be affected by inflation which means the general increase in the prices of goods over time. Inflation can affect the ability of money to be a stable store of value by reducing its purchasing power over time. Example: Betty bought gold bars and stored them in her safety deposit box five years ago. She now wants to buy a house and needs more money to acquire the house debt free. She then sells her gold bars and makes enough money to make the purchase.

Money acts as a medium of exchange

Money acts as a medium of exchange for products and services. It is the best exchange form since it is easy to assign a monetary value to products and services. Money makes it possible for products and services to be given a monetary value that they can be exchanged with. In the past, the value of items was often unclear and this led some buyers to be taken advantage of by the sellers. For example, if Person A has a goat and they are looking to exchange it for a dress, it is not always clear what defines the value of the animal to be enough to match the value that is needed for the dress. The value of either item can be higher or lower, meaning that the buyer or seller can both lose from this transaction. Example: Molly is hungry and wants to eat a hamburger. She walks into the fast food restaurant next to her office building and makes her order. The hamburger is ten dollars. She reaches into her purse and removes a ten-dollar note and hands it to the cashier. She is given a receipt and allowed to move to the counter where she gets to pick up her food. She receives her purchased hamburger and goes back to the office.

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