Role of Money in Modem Economy

Role of Money in Modem Economy
As already stated that money performs a variety of functions in the modern economy. These functions have made the role of money extremely important.
The role that money plays in our today's economy can be judged from the following examples.
Money in Capital Economy:
Capital economy is characterised by freedom of choice and enterprise. Consumer is sovereign and the price mechanism works'freely without any government intervention.
1. Production:
Starting with the production, the producer produces because of profit motive which is expressed completely in terms of money. The decision regarding what to produce, how to produce, for whom to produce are made in the framework in which money is at the base. The cost of production which consists of costs of direct material, direct labour and overhead expenses is calculated in terms of money and sale price is also determined in monetary terms.
2. Consumption:
In capitalistic society, consumer is a king, free to make choice about what he should consume. The consumption depends on income. Both the income and consumption expenditures are stated in terms of money. The equi marginal utility theory of economics leading towards maximum satisfaction is only workable because of existence of money. The channelling of wealth among different choices of consumption is only possible because a consumer knows in exact terms how much purchasing power he got and how expensive a particular product is.
3. Pricing of Factors of Production:
The money has made it possible to evaluate the human effort and thus to determine its wage or reward. The factors of production whether material or human are all priced in term of money.
4. Pricing of Environmental Factors:
Money has helped in pricing and thus determining the importance of snvironmental and natural resources. The gas and oil in wells, fishes in oceans, trees in jungles are all priced in monetary terms.
5. Penalties of Environmental Deterioration:
It is evident that you can't assign value to fresh clean water, clean environment, fhese are all precious things. However the penalty for any deterioration of such factors is tlways stated in money terms. Thus money also helps in a way to discourage the leterioration of natural resources.