Functions of money

Anything which is declared by the state as money is money. Anything which is generally accepted in payment for the goods and services or the repayment of debts is money. Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account.

Medium of exchange:

Money's most important function is as a medium of exchange to facilitate transactions. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.

Store of value:

In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and stamps. Money may not even be the best store of value because it depreciates with inflation. However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Money is an easily transported store of value that is available in a number of convenient denominations.

Unit of account: 

Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.

An ideal market economy is one where all goods and services are voluntarily exchanged for money at market prices. Such a system squeezes the maximum benefits out a society’s available resources without government intervention.