What are the main functions of money? How does money overcome the shortcomings of a barter system?
Main Functions of Money:
Money performs three main functions. First, it acts as a medium of exchange, facilitating transactions in a large economy by eliminating the need to find suitable persons for barter exchanges. Second, money serves as a unit of account, allowing the value of all goods and services to be expressed in monetary units, making it easy to calculate relative prices. Third, money acts as a store of value, enabling individuals to store wealth for future use.
Overcoming Shortcomings of Barter System:
Money overcomes the major drawback of barter system—lack of double coincidence of wants. In barter, exchange requires two persons to have exactly opposite demands, which is highly improbable. Money solves this by being a commonly acceptable medium of exchange. Additionally, barter makes it difficult to carry forward wealth since commodities like rice are perishable and require storage space. Money, being non-perishable with low storage costs, can be stored for future use and is acceptable to anyone at any point of time.
Explanation
The textbook clearly outlines three functions of money: medium of exchange, unit of account, and store of value. The context explains how barter suffers from lack of double coincidence of wants and difficulty in storing wealth (perishable goods, high storage costs). Money overcomes these by being universally acceptable, non-perishable, and having low storage costs.