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Significance of Money

Last Updated : 26 May, 2023
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Money is derived from the Latin word Moneta, which is another name for the Goddess Juno of Rome. The first mint was established in Rome in the temple of the Goddess Juno or Moneta. Money cannot be explained only in terms of the matter it embodies, such as metal or paper. It should be explained by the purpose or use it provides. Money performs four primary functions: medium of exchange, measure of value, store of value, and standard for deferred payments. Therefore, anything that is commonly accepted as a medium of exchange, a measure of value, a store of value, and a standard for deferred payments is referred to as Money. In general, Money refers to Notes, Coins, and Bank-cheques. However, economists continue to disagree on this point.

Definitions of Money

It is impossible to provide an undisputed, widely accepted definition of money. Usually, one of the two approaches for the term “money” is used:

  1. Money is defined as anything that can be used to pay for goods and services or to settle debts.
  2. Money is defined as anything that serves as a means of trade, a measure of value, and a store of value.

Significance of Money

Significance of Money


Money is highly significant in all fields of economics. According to Marshall, “Money is the pivot around which the whole economic science clusters.” The importance of money in various economic fields is as follows:

1. Importance in Consumption:

A consumer gets his income in the form of money. He can use the money to buy the products and services he desires. According to the law of equi-marginal utility, the consumer spends his income in a way that maximises his level of satisfaction. A customer should spend his money in such a way that the ratio of marginal utility to commodity price is the same for all commodities he buys.

Money provides consumers with freedom of choice.

In the words of Prof. Robertson, “Money helps each member of the society to ensure that the means of enjoyment to which he has access, yield him the greatest amount of actual enjoyment which is within his reach.”

Money promotes consumer sovereignty in capitalist systems. This means that producers must produce whatever is desired by the consumers. It is beneficial for a consumer to save in terms of money.

According to Prof. Friedman, “Saving in terms of money generates a sense of confidence among the consumers.”

2. Importance in Production:

Money is also crucial in the field of production. A producer will like to manufacture only the things that will generate the most profit. However, estimating profit is impossible unless the producer knows the prices of various goods, their suppliers, and the cost of production. Money is an important variable for information about the demand for commodities and the supply of goods. Money promotes large-scale manufacturing by facilitating specialisation and the division of labour. The ratio of marginal productivity to factor price should be the same for all of the production factors in order to maximise the production of given resources.

In the words of Prof. H.G., Molten, “Money is extremely important for gathering different factors of production. It is with money alone that man buys the goods he needs. And, it is with money alone that he buys the necessary labour and obtains the services of managers and experts”.

3. Importance in Exchange:

Money has made the process of exchange much simpler by eliminating the demerits of the barter system of exchange. Money is the basis of the price mechanism. Cost and revenue estimates are determined in terms of money. Money has facilitated future transactions, contributing to the growth of both domestic and international trade. The creation of credit, which is based on money, also encouraged exchange. Money has significantly expanded trade. In fact, money is the foundation of modern market organisations.

4. Importance in Trade:

Money has improved both domestic and international trade. Trade was limited under the Barter System due to several challenges. The invention of money encouraged large-scale production. Large markets are required for large-scale production. In this situation, various kinds of money, such as bills of exchange, promissory notes, and drafts, play a significant role. Money has enabled the establishment of money markets with a view of enhancing trade.

5. Importance in Distribution:

Money promotes the allocation of national income among various factors of production. In terms of money, it is simple to pay pent for the use of land, interest for capital, salaries for labour, and profit for entrepreneurship. It was difficult to calculate factor shares under the Barter System. With money and production, rewards can be distributed in accordance with a contribution to total output. Money has proven to be a significant instrument in ensuring an equitable distribution of national income.

6. Importance of Public Finance:

Public finance is a significant phenomenon for any welfare state in the modern age. The important sources of finance for the state are taxes, public debt, deficit financing, and so on. All of these are obtained only in the form of money. Money serves as a useful instrument for achieving the objective of maximum social welfare. The Government establishes a budget for the upcoming year’s expected revenue and expenditure. All of these estimations are monetary in nature. As a result, money is crucial in the preparation of the Government Budget.

7. Capital Formation:

It was not possible to save and invest in terms of goods under the Barter System. Money has made it possible to save and invest. Saving refers to the part of an individual’s income that is not spent. Savings, when invested, result in capital formation. Capital formation enhances the productive capacity of the nation. Accordingly, increased production leads to economic development.

8. Solution to Central Economic Problems:

Money has facilitated the right solution to the central problems of the economy; i.e., what to produce, how to produce, and for whom to produce. Money facilitates the continuous flow of goods and services.

In the words of Prof. Robertson, “The existence of monetary economy helps to discover what people want and how much they want arid so to decide what shall be produced and in what quantities and to moke the best use of its limited productive power.”

9. Basis of Credit:

The trade is based on credit in the modern age. Credit creation was not possible in the absence of money, as a store of value of money has facilitated credit creation.

10. Index of Economic Development:

There are some central basic elements of economic development, like national income, per capita income, and so on. All of these elements can be simply determined by the money form. If the country’s national and per capita income has been increasing and there is equality in income distribution, it may be properly believed that economic development is taking place.

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