Significance of Money

Money is the life blood of a modern capitalist economy. Without money this economy cannot function smoothly. Just as the strength and vitality of a human body is judged by the amount of blood and its proper circulation, in the same way the strength and extent of development of the economy can be judged by the requisite supply and proper circulation of money in the economy. The significance of money, to a great extent, depends upon and is derived from the various functions it performs. These are given below:

1) Significance of money in consumption: Nowadays people receive their incomes in terms of money. This facilitates in exercising Free choice of consumption. Though, given their limited money income the consumers cannot buy each and everything that they desire yet money income gives them freedom to buy such goods and in such quantities which can yield them maximum satisfaction within that income-limit Besides, money gives the consumers liberty to choose between the present and the future consumption, i.e., how much to be spent on present consumption and how much to be saved from the given present income for Future consumption.


2) Significance of money in production: Money is not a factor of production, yet it facilitates production Use of money has led to expansion of market of goods and services. This has resulted in large scale production and technological improvements, thus minimising the cost of production. however, large scale production requires division of labour and specialisation which is impossible under a barter-system. Besides, money (through price mechanism) indicates to producers the type and quantity of goods they should produce.


3) Significance of money in trade: Being a medium of exchange, money facilitates trade as well. Money constitutes basis of price-mechanism and, thus helps in determining prices of goods and services through the forces of demand and supply. Besides by equalising marginal cost with marginal revenue of each product (measured in terms of money), the sellers can arrive at profit-maximising level of sales of their products.


4) Significance of money and economic progress: Introduction of money has led to the emergence of large-scale production resulting in constant urge to accumulate capital and develop new techniques of production. Thus, the role of money in encouraging material progress is significant


5) Significance of money in public finance:Governments require resources to run the administration smoothly for which they levy taxes and also charge fees, fines, etc. Without money, taxes received will be in the form of goods which may or may not be useful from government's point of view, e.g., shoemaker paying tax in the form of shoes and green-grocer in the form of vegetables. But taxes received in money give freedom to government regarding choice of things which government needs for the developmental purposes.


6) Money and foreign trade: Money have helped in the expansion of foreign trade and thereby raise the levels of consumption the world over. It is because with the help of money we can transact not only those goods which are produced domestically but also those which are produced by other countries. The possibilities of exports and imports with the help of money has resulted in expansion of international trade and co-operation.

The significance of money in all walks of life is so immense that modem life without money cannot even be imagined. It has rightly been remarked that 'money is a privet around which all economic activities cluster'.

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