Question

Discuss the economic importance of money.

Hint:

Think \textbf{4Fs + 4Gs}: Functions (Medium, Measure, Store, Deferred) and Gains (Trade, Growth, Governance, Globalization).

Answer 1

Step 1: From barter to money.
Barter suffered from double coincidence of wants, indivisibility, and lack of common measure. Money solves these frictions and becomes the universal lubricant of exchange.
Step 2: Core functions.
(1) Medium of exchange — facilitates buying/selling without barter;
(2) Unit of account — common measure of value/prices;
(3) Store of value — transfers purchasing power over time;
(4) Standard of deferred payments — enables credit/loans and contracts.
Step 3: Expands trade, specialization, and productivity.
With easy exchange, firms & workers specialize, division of labour deepens, and market size expands—raising efficiency and output.
Step 4: Basis of financial system & credit creation.
Banks intermediate deposits into loans; money enables payments, settlements, digital transactions (UPI/NEFT), and complex finance (bonds, equity), powering investment and growth.
Step 5: Economic calculation & policy.
Prices expressed in money allow cost–benefit analysis, accounting, budgeting, and measurement of macro indicators (GDP, inflation). Central banks use monetary policy (interest rates, liquidity) to stabilize the economy.
Step 6: Savings & investment channel.
Money provides liquid savings instruments (deposits, funds), enabling capital formation for infrastructure, industry, and innovation.
Step 7: Facilitates government finance & taxation.
Collection of taxes, public expenditure, and deficit financing operate through the monetary system; thus, money underpins public goods and welfare.
Step 8: International trade & exchange.
Foreign exchange (currencies) and payments systems enable cross-border trade, remittances, and capital flows, integrating economies.
Step 9: Conclusion.
By easing exchange, enabling credit, guiding prices, and supporting policy & trade, money becomes indispensable for modern economic growth and stability.