In order to obtain a commodity, we have to give something in return. That is, we have to pay some consideration in money or money’s worth. This process is called an exchange. There can be two types of exchanges – money exchange and barter exchange. In early days, barter exchange was prevalent. Money as a medium of exchange came much later when people saw deficiencies in the system of barter exchange. For example, consider a person with excess rice in hand and who wants to exchange it for some clothes. Now searching a person who has surplus clothing and who wants to exchange it for rice only is very difficult. The search costs become restrictive as the number of individuals increase. Thus, to avoid such a problem, an intermediate good is necessary which is acceptable to both parties. Such a good is called money.

Which of the following are functions of money?

Medium of exchange Unit of account Store of value All of above

All of above

In the above paragraph, function of money as medium of exchange is discussed. But it has other functions as well. They are – store of value and unit of account. Unit of account means the value of all goods and services can be expressed in monetary units. Money is not perishable and its storage costs are also considerably lower. It is also acceptable to anyone at any point of time. Thus money can act as a store of value for individuals.