Evolution of Money: The fundamental aim of man is to satisfy his economic wants. In earlier days man produced whatever was needed by him. But in course of time, economic wants started to increase. So to satisfy all his economic wants, man started to exchange the goods. In earlier days the system that was followed for exchange is known as the Barter System. Under this system there was direct exchange of goods for goods. But man started to face many difficulties under this system. So to overcome these difficulties man introduced money.
First precious metals were used as money. Then, in course of time, a small quantity of a metal, with a with a stamp or mark put on it to indicate value, was introduced to serve the purpose of money. This process is called coinage. Now a days paper money, duly sanctioned by law, with appropriate signs and symbols, is used used universally as the medium of exchange. For small transactions, however, coins are still used.
Legal Tender Money: Legal tender money means money, the tender or payment of which constitutes, by law, the sufficient discharge of a debt.
The fundamental difference between money and other commodities is that money is generally acceptable in payment for goods, services, debts and compensations, while other commodities are not. People want other commodities for the commodity's sake - to consume, enjoy or otherwise utilize them, but money is wanted not for its own sake but because it has purchasing power over other goods.
The real significance of money is that it is a claim, which can be used by its owner to buy everything. As because general acceptability is the fundamental characteristic of money, we can define money as anything which is generally accepted by people in exchange for commodities or services, or in payment of debts or compensations.
Mr. Paul Samuelson: "Money is an artificial social convention."
Definition: Money is something, which serves as a medium of exchange. It is accepted unquestionably by everyone in exchange for goods and services. Different economists have defined money in different ways. According to Mr. Francis Walker "money is what money does."
We can define money as anything, which is accepted by the people
1. as medium of exchange,
2. as a measurement of value,
3. as a store of value,
4. as a standard of deferred value, and
5. as a transfer of value.
From this above definition follows the functions of money.
1. Medium of Exchange: Money promotes or facilitates exchange of goods and services. Our whole economic system depends entirely upon money, without which all modern forms of consumption, production, distribution and exchange will cease to exist.
2. Measurement of Value: Money assigns a value or price to any commodity or service. Every commodity or service can be weighed in terms of money. So it serves as a measuring instrument for value.
3. Store of Value: Money is the best form in which one can store his wealth. It has a universal usefulness at any given time, which makes it the best form as a store of value.
4. Standard of Deferred Value: Money serves as standard for deferred payments, that is payments, which are to be made in future.
5. Transfer of Value: Since any economic commodity or service can be weighed in terms of money, for any kind of value transfer it acts as the best medium.
Demand for money or reasons for holding money: J, M. Keynes forwarded three primary reasons or motives for holding money.
1. Transactions motive: Every man requires a certain amount of money to meet his daily expenditure. From this, the transaction demand for money arises.
2. Precautionary motive: People normally hold more money than what is required for his transactions purpose. He keeps some extra money in hand to meet the unforeseen circumstances, or any kind of emergency situation. This gives birth to the precautionary demand for money.
3. Speculative motive: Money, when invested, brings income in the form of interest. If someone decides to hold money he will be foregoing the interest that it would have yielded, if invested. Thus holding money means preferring liquidity, as money is the most liquid form of asset. When there is an expectation that interest will rise in the future, people purchase securities to earn higher interest income in the future. Interest is the reward for parting with liquidity. Thus individuals or institutions, who have sufficient money left after satisfying the first two demands, may also need some money for speculative purpose.
In the short run, transactions demand and precautionary demand are more or less fixed. Only under a situation of rising prices and consequent inflation, these two demands may increase in the short run. Otherwise in the short run, it is the speculatory demand for money, which determines the overall demand for money.
Supply of Money: The supply of money basically means the quantity of money in circulation. In simple terms, the total amount of cash held by individuals and institutions in the form of notes and coins, together with the total value of deposits held in bank accounts of commercial banks, together with bills and bank notes constitute the supply of money. Some writers prefer to use the term money in a narrow sense to mean only legal tender money. Others include deposits, but only such deposits as are withdrawable by cheques, thus excluding non-chequeable deposits. The measures that are taken to control the total supply of money in an economy are compositely called the Monetary Policy.
Value of money: Meaning: Value of money means the purchasing power of money. It means that goods and services can be purchased with money. When more goods and services can be purchased with money, the value of money is said to be more, and vice versa.
Determination of the value of money: There are two theories given by the economists for the determination of the value of money. The two theories are
1) Quantity Theory of Money
2) Income Theory of Money
Subscribe to:
Post Comments (Atom)
Update(s):Post(s) under preparation: -
_______________________________________
View Chandra Bhanu's Art at Profoundfeeling.blogspot.com
_______________________________________
View Chandra Bhanu's Art at Profoundfeeling.blogspot.com
Labels
indifference curve
investment
demand-pull inflation
economy
fiscal policy
monetary policy
cost-push inflation
demand
demand for money
destabilized economy
economics
stagflation
supply of money
Opportunity Cost
Quantity Theory of Money
Theory of Consumption
World economy
automatic stabilizer
capital
choice
consumption function
current accounts deficit
deflationary gap
demand for investment
depression
derivation
effects of inflation
equilibrium
fiscal deficit
fresh investment
growth
imbalance
inflation
interest
money
perfect competition
savings
savings function
world
Accounting Profit
Adam Smith
Alfred Marshall
Diminishing Marginal Utility
Economic Profit
Equimarginal Utility
General Equilibrium Theory
IS Curve
J. M. Keynes
Keynes' Theory of employment
LM Curve
Lionel Robbins
Normal Profit
PPC
Production Possibility curve
Software system development
Utility Analysis
accelerator
account
accounting
alternative uses
autonomous investment
balance of payments
book keeping
capital goods
classical theory of the rate of interest
commodity
consumer
consumer goods
consumption
credit
debit
definition
deflation
discretionary
double entry
economic functions
economic wants
educated
education
ends
energy
ermployment
full employment
functions of money
growth rate
habit
imitation
imperfect competition
income
income analysis
income determination
income effect
induced investment
inflationary gap
investment function
knowledge
labour
less than full employment
liquidity preference theory
long run
long run equilibrium
means
monetary analysis
monetary measures
monopoly
multiplier
price
price effect
price maker
production possibility frontier
profit maximization
propensity
revealed preference analysis
sacrifice
say's Law
scarce
science
shifts of IS LM curves
short run
short run equilibrium
shut down conditions
slow down
society
stagnation
student
subsidies
subsidy
substitution effect
success
sunk capital
supply
supply of savings
technology
unproductive
wealth
world economy 2012
No comments:
Post a Comment
Want to say something? Say it!