Importance of Money –
According to the classical economists, money only affects the price level in the economy and it has no effect on the levels of the real income and employment.
They argued that what we really want was goods and services which satisfies our wants and promote our welfare. So, according to them, we must go behind the veil of money and see what it changes in the total output of goods and services or in real income. It is true that what we really want is not the money itself as it is but the goods and services which money can buy and satisfy our wants. But this doesn’t mean that money has no real importance. In the modern economic life which is very complex and based on the division of labour, money has made it possible and increased productivity greatly, this is something which wouldn’t have been possible without money.
Money plays a very important role in the modern economy.
1. Money helps us to avoid double coincidence of wants –
Money enables us to understand the complex system of a large number of prices of goods and services in terms of each other that prevail in the barter system which made it difficult to compare various prices and take the right optimal decision. Money made it possible to compare prices of different goods and services in a standard unit.
For example, if I sell my services as an artist, I need to know only money price of that service and money price of the goods and services that I will buy, I don’t need a complete list of various offers of goods as price of my service.
2. Money facilitates Exchange and Promotes Trade –
Money serves as a medium of exchange, a common measure of value, store of value, standard of deferred payment, all these functions of money makes it very important for trade which involves exchange and for economic growth. Money has removed the difficulties of barter system specially the double coincidence of wants and a common measure of value and helped in the economic growth and development of all the countries in the world.
Money facilitates the process of exchange, without it, trade and exchanges must have been few and far between and it also would have cost a lot of time and energy.
3. Money Promotes Specialization and Productivity –
Money has a great importance because it promotes the division of labour or specialization and productivity in the modern economies. In the barter system trade or exchange was difficult, a man has to be self sufficient. In the absence of money there were many difficulties in exchanging goods and services. This was the biggest problem to the division of labour and specialization among individuals and countries.
Money opened the opportunities of specialization by facilitating exchange and trade of goods and services which lead to the expansion of production.
According to Walters, If a modern economy were somehow deprived of the monetary mechanism and driven back to the system of barter, the level of output would be much lower and the variety of goods and services much smaller than is enjoyed with a money system.
Money serves as a factor of production which enables us to increase and diversify output.
4. Money Promotes Saving –
Money has made saving much easier than it was in the barter system. Increase in savings leads to the increase in investment which promotes the economic growth of a country. Further money has made the process of borrowing and lending much easier which leads to an increased level of production and consumption in an economy. Investment which is made possible by savings raises the rate of capital formation, which in turn raises the output in the modern economy.
5. Money Helps in Maximizing Satisfaction by Consumers –
To consumers money represents a general purchasing power, they can buy anything and anytime with money. Consumers can easily compare the relative prices of goods and services and expected utility from them as the value of all goods and services are expressed in terms of money (a common measure). A consumer can easily spend his money on different goods and services in such a way that marginal utilities of goods and services are proportional to their prices. This will maximize the consumer satisfaction.
6. Money Helps in Maximizing Profits by Producers –
The producers can easily compare the money cost and money income of the different levels of the output and decide about the level of output which maximizes their profits by equating marginal cost with marginal revenue. Producers can easily decide about the units of a factor to be employed by comparing its marginal revenue product with the money payment they have to make it. To maximize profits producers can easily equate marginal revenue product of a factor with the marginal factor cost on that factor.
7. Money can help an Economy to Overcome from Recession or Depression –
According to the modern economists, Money plays an important role in bringing real changes in the economy. According to them in tomes of recession or depression when there exists a lot of excessive productive capacity and unemployment, expansion of money supply (by government) by creating new money, will cause aggregate demand to increase, which in turn will increase the output and employment in the economy and pull out the economy from the recession or depression.