Question

Explain the Common Denominator of Values secondary function of money.

Answer 1

The function of money as a common denominator is very important, it measures the value of goods and services in common values of money. To understand how function and how much important it is we need to see what used to happen when money was not there and there used to be a barter system.

Under barter system the value of good was used to measure in terms of another goods so that people could agree to exchange the goods. For example if someone with fruits wanted to buy milk then two people would have to agree on a exchange rate for milk and fruits. And if the same man with fruits wanted to buy meat then he will have to find a man with meat and to again they will have to agree on value of fruits in terms of meat.

But due to money things have changed drastically, now we can measure the value of any good and services in terms of money so it makes the transactions easier for everyone in the economy because now everyone has a common value of goods and services in terms of money. That's what the common denominator of values means as a secondary function of money. So the use of money as a common denominator has reduced the number of different exchange rates between different numenr of goods to just one exchange rate which in terms of money for all the goods and services.