Role of Money in Modern Economy | What are the functions of Money in a modern economy?

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Hi friends, in today’s article we are going to know about the Role of Money in Modern Economy and also know the static and dynamic functions of money. So let’s discuss in details.

Role of Money in Modern Economy

Money occupies a central position in our modern economy. Money is everywhere and for everything in the modern economic life. Money is of vital importance to the operation of the national and international economy.

The significance role of money in modern economy can be explained in terms of its static and dynamic functions.

Static Functions of Money

The static function or traditional function of money acts as a passive or technical tool to ensure a smooth working of the economic system. It does not have a causative influence on the economic activities. The static functions of money are

(i) Medium of exchange

(ii) Measure of value

(iii) Standard of deferred payments

(iv) Store of value and

(v) Transfer of value.

Moreover money also acts as a medium of price mechanism. Money is the medium through which the price mechanism operates and establishes a balance between demand and supply in the market.

Dynamic Functions of Money

The dynamic function of money or the dynamic role of money are those by which money actively influences the economic system of a country. In its dynamic role, money tends to influenced the modern economy in a number of ways which are as follows –

• Money and Consumption – Money possesses much significance for the consumption activities. Money enables a consumer to utilize his purchasing power and get maximum satisfaction by obtaining what he wants.

In fact, the consumer’s can be expressed through money spending. Thus, money provides freedom of choice of consumption. In other word, money enables a consumer to make a rational distribution of his income on various goods of his choice.

• Money and Production – Money has equal importance to the producer. He keeps his account of the values of inputs and outputs in terms of money. Without money production on a large scale would not be possible.

The use of money enables a producer to concentrate on the organization of production process. It has also facilitated borrowing and lending which are essential in the production process.

• Specialization and Division of Labour – Money plays an important role in large scale specialization and division of labour in the modern production process. Each worker is paid ways accordance with the nature of his work and specialization of the industrial sector.

• As the Basis of Credit – The entire modern business economy is mainly based on credit system which in terms is based on money. All monetary transaction consist of cheques, bills of exchange, drafts, etc. which are not money, but close to money.

Bank issue such credit instruments and create credit which helps in maintaining circular flow of income within the economy.

• Capital Formation – Money acts as a means of capital formation by transforming savings into investment. Capital formation requires creation of saving, mobilization of savings and channelization of savings into productive investment, which are possible only through the use of money.

• As an index of Economic Growth – Money acts also as an index of economic growth. The various indicators of growth such as GDP, PCI, etc. are calculated in terms of money. Changes in the value of money reflect the growth of an economy.

• Distribution of Income – Money plays an important role in the process of distribution of national income among the various factors of production in the form of rents, wages, interest and profits. All these incomes are measured and received in terms of money.

• Importance in Public Finance – Public finance deals with govt. income and expenditure. Government receives income by the way of taxes, fees, fines, etc. all of which are collected in terms of money. Similarly, all govt. expenditures and payments are done through the way of money. Thus, the entire public finance is managed only in a money economy.

In this way, money plays the most significant role in the modern economy.


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