Question

2. List and explain the logic behind the "four functions of money." Then, consider the following: In many prisons, cigarettes are used as money. Do cigarettes in prison have the ability to satisfy these four functions? Explain. (20 possible points)

Answer 1

Money is any item that is genarally accepted as payment for goods and services and repayment of debts in a particular country or socio economic context. Central bank of the country is responsible for money supply and monetary system.

FOUR FUNCTIONS OF MONEY

1. Medium of exchange : Most important function of money is medium of exchange to facilitate transactions. Without money all transactions would have to be conducted by Barter which involves exchange of one good or service for another. Money effectively eliminates drawbacks of medium of exchange in barter system.

2. Measure of value : Under the barter system, it is very difficult to measure the value of goods. For example, a horse may be valued as worth five cows, or a Maruti car may be equivalent to ten two wheelers. Thus one of the disadvantage of barter system is that any commodity or service has a series of exchange values. Money effectively eliminates the problem of measure of value

3. Store of value : In order to be a medium of exchange, money must hold its value over time; that is; it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange. Money is more liquid than most other stores of value because as a medium of exchange it is readily accepted everywhere.

4. The basis of credit : Money facilitates loans. Borrowers can use money to obtain goods and services when they are needed most. They are not required to wait for, say ten years, so as be able to save enough money to buy costly items like car, bike and T V. Money facilitates basis of credit.

Cigarettes do not have the ability to satisfy four functions of money.

1. Cigarettes are not a best medium of exchange

2. Measure of value of goods and services is very difficult. Some times one Cigarette is enough for one glass of milk some times it may be 5.

3. It do not provide store of value over a period of time.

4. No credit available for Cigarettes

5. Difficulties and dispute in exchange

6. Price varies accordance with availability of goods and services.

7. Transfer of value is difficult because it ignore store of value.

8. Under valuing for less demanded products

9. Over valuing for less demanded products

10. Chance for unfair trade practices in exchange

11. Lack of proper market place.

12. Difficulty in storage

13. Based on availability of Cigarettes

14. Partiality in exchange

15. Exchange of goods worth service of a person is difficult

16. Indisibility of certain goods

17. Price depends up on Cigarettes

18. chance for discriminating pricing method

19. complex and difficult in comarison of price

20. It can't be used for future payments