Money also performs certain contingent functions.

I do agree with the statement because

Contingent/Incidental Functions of Money :
According to Prof. Kinley, money in modern times also performs certain contingent functions. Following are some contingent or incidental functions of money.
i)       Measurement and Division of National Income - Money facilitates estimation and distribution of national income. Numerous goods and services are produced in a country during a period of time. When these goods and services are converted in terms of money, calculation of national income becomes possible. Factors of production like land, labour, capital and organisation contribute to national income. All these factors get their respective rewards .like rent, wages, interest and profit in terms of money. Thus, total production and factor prices are easily expressed in terms of money.
ii)      Basis of Credit - Modern economy is based on credit. Commercial banks create credit on the basis of their cash holdings. Without the use of money, credit instruments cannot operate. One cannot issue cheque without having a bank balance. Money provides the liquid base of the banking system.
iii)     Imparts liquidity to wealth - Money is called the most liquid asset. Money can be easily converted into any asset and any asset can be converted in to money e.g. a person can purchase gold and if he wants, he can sell it and can purchase government bonds, securities etc. Liquidity of money has improved the mobility of capital from a business in loss to a profit making business. It also facilitates transfer of capital from less productive use to a more productive use.
iv)     Equalization of marginal utilities and marginal productivities with Price - Prices of goods, services and prices of all factors of production are expressed in terms of money. It helps the consumers to compare marginal utilities of goods with their prices. Based on this comparison consumers can allocate their income on various goods, in such a way that the price of each commodity is equal to its marginal utility.
Producers compare factor prices like rent for land, wages for labour, interest for capital, with marginal productivity (contribution made by additional factor unit to total productivity) of factors of production. The producers try to maximize their profits by equalizing marginal productivity of a factor with its price.
v)      Estimation of Macro Economic Variables - Macro Economic variables like Gross National Product, total savings, total investment etc. can be easily estimated in monetary terms. It also facilitates government tax collection, budget etc.

Thus, in modern monetized economy money has facilitated production, distribution, saving etc. It encourages international trade, transport, formation of capital market and other financial institutions.

No comments:

Post a Comment