Role of Money in a Modern Economy

Beyond doubt, money facilitates and motivates all economic activity relating to consumption, production, exchange and distribution of wealth.

Money measures the intensity of human wants and the utility of a commodity to a consumer. Money enables a consumer to maximise his satisfaction.

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Also, money stimulates production by facilitating saving and investment and thus helps in capital formation. It enables the hiring of factors of production and the entrepreneur to maximise his profit. Money facilitates exchange and thus promotes trade. Money also serves as a common denominator for the distribution of social product. It is in terms of money that wages, rent, interest and profit are determined.

Money enables the price-mechanism to function and serves as an instru­ment for the allocation of productive resources of the country among the various competing uses. Money is thus an extremely valuable instrument for accelerat­ing economic growth and promoting social welfare. There is a continuous or circular flow of money among the various sectors of the economy and as such it oils the economic machine and makes it work smoothly.

As Prof. Robertson observes, “the existence of monetary economy helps society to discover what people want and how much they want and to decide what small be produced and in what quantities and to make the best use of its limited productive power. And it helps each member of society to ensure that the means of enjoyment to which he has access yield him the greatest amount of actual enjoyment which is within his reach.” Even in a socialist economy, price tags are essential for its smooth and efficient working.

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