IMPORTANT THEORIES IN THE VALUE OF MONEY

VALUE OF MONEY =this refers to the amount of goods and services which be given in exchange for a unit of
money. (by Gregorio Miranda ) it is synonymously used or termed as the purchasing power or money.
Here, we may say that the value of a peso expressed in terms of commodities may be equal to 2 pieces of
candy or 4 sheets of yellow paper, however, same peso may command a lesser number of goods but
sometimes it may also command a greater number of goods. *

KINDS AND SOURCES OF VALUE OF MONEY:

1. Intrinsic Value= if money is in the form of commodity, its value comes from the importance of that
money as a commodity and not as a medium of exchange. This means that goods, which are used as
money, have the capacity to satisfy human wants. This value varies in accordance with the law of
supply and demand.

2. Face Value = this value is one which is so indicated on the face of the notes of coins otherwise known
as its "value panel". This value comes from the government that sets its general acceptability. This
value guides us in the determination of the relative value of goods and services, as they are compared,
produced and exchanged. It is affected by changes in the law of supply and demand.
3. Purchasing Power Value = this value could be determined by the quantity or number of goods which
are given in exchange for the monetary unit. This is derived from the relative demand and supply of
money. It changes every time there is a change in the price level.
4. Par Value = this refers to the value of the gold content of the monetary unit.
5. Free Exchange Value = this results from the interplay of the forces of supply and demand for foreign
exchange. This value comes from the importing and exporting activities of foreign exchange users all over the
world. It refers to the value of the local currency in relation to the value of foreign currency.
RELATIONSHIP OF PRICES AND THE VALUE OF MONEY: This relationship states that the price of commodities
and services vary inversely with the value of money. This means that when the general price level is high, the
value of money is low; but when the price decline, the value of money is high.
CHANGES IN THE VALUE OF MONEY: The purchasing power or value or money does not remain constant.
Therefore, it may either increase or decrease depending upon the change in the prices of goods and services
that are offered for sale in the market. But the price level depends upon the supply and demand for goods and
services. These, in turn are dependent upon the following:
On the Demand Side
a. income level= here, individual tends to demand more of such commodity if he has more income, but
the lesser income an individual has, the lesser he will demand for such commodity.
b. population= the more number of people residing in an area, the more consumption that will create
greater demand for such commodity; but the lesser the population, the lesser they consume that will
create greater demand for goods and services.

c. fashion, taste, habit, tradition, etc. = any increase or progress in any one of these factors will cause
the demand to rise, thus, an increase in price.
d. presence/ absence of substitutes = the presence of substitute tor a certain commodity tends to lessen
the demand for such commodity, thus a fall in price; but the absence of substitute for a certain
commodity tends to increase to demand for such commodity, thus, a rise in price.
On the Supply Side
a. availability of raw materials = any increase in the supply of raw materials will automatically increase
the supply of that finished product which will spell the quantity of the supply; but any inadequacy of
raw materials will decrease the quantity of finished products, thus, decrease in its supply.
b. cost of raw materials = any increase in the price of raw materials tends to create an increase in the
supply of finished products.
c. level of technology = any increase or progress in the application of more advanced technology will
increase the supply; but the poorer or decreased technology applied, the lesser the supply.
d. support/restriction of government = the more support with lesser government restrictions, the
greater is the supply; but the more restrictions with lesser government support, the lesser is the
supply.
THE IMPORTANT THEORIES IN THE VALUE OF MONEY:
1. The Quantity Theory of Money= this theory holds that the value or money at any given time and place
depends upon the three (3) important factors: a) money supply b) velocity of money supply and c) physical
volume of trade. Any change in any of these factors will cause a change in the value or money.
Money Supply= refers to the amount or quantity of notes and coins issued in circulation. Here, any increase of
money supply will increase prices, which will result to a very low value of money, however, any decrease or
money supply will decrease prices which will result to a high value of money.
Velocity of Money Supply= this refers to the rate of turnover of money in circulation. It also refers to the
speed of the rapidity of the transfer or money from one hand to another hand.
Factors Affecting the Velocity of Money Supply:

1. regularity of income receipts = applies to wage earners receiving relatively stable income at regular
periods of time and also to those whose income are irregular. On the part of the former, the tendency
is to spend such income before the next income is received, hence a faster velocity of money. On the
part of the latter, the tendency is to hold on their money income for longer period until they are sure
that their income is enough to tide them over the lean period, hence, a slower velocity of money.

2. system of payments used in the community = it applies whether the payments are to be made daily,
weekly, semi-monthly, or monthly, quarterly or annually. Here, an individual who has a shorter period
of waiting for his next pay has the tendency to spend his income faster than an individual who has to
wait for a longer period of time to receive his next pay.
3. stage of credit development and financial system = this refers to how the society appreciate or ignore
the importance of the existence of credit facilities and the availment of such services extended by the
financial system of the country.

 here, the lack of financial institutions for the availment of credit- causes slow rate of turnover of
money and the negative attitude of people to avail themselves with result - also causes very slow rate
of turnover of money supply. On the other hand, if people have possible attitude or response to the
credit and financial system - the velocity of money supply will become faster,
Physical Volume of Trade = this refers to the amounts of goods and services offered for sale in the market at a
given period of time.
Factors Affecting the Physical Volume of Trade:

 Production = refers to the transformation of raw materials into finished products. Here, the shorter
faster period of production, the greater the physical volume of trade; but the longer/ slower period of
production, the lesser the physical volume of trade.
  Transportation= this is the transfer of goods and services from one place to another place which
includes the means and or access transportation. Here, the mere accessible the transportation
more/greater physical volume of trade; but the less accessible the transportation, the lesser the
physical volume of trade.
 Merchandising = this refers to the distribution of produced products to the ultimate consumers which
involves the channels of distribution.
2. The Transaction Theory = this theory seeks to explain that the value of money is the result of the
interplay of the forces of supply and demand. This means that:
a. a given quantity of goods & services are seeking buyers and therefore, are creating a demand
for money= supply the market, and,
b. a given quantity of money and demand deposits which will be used to create demand for and to
purchase the goods and service supply the market.
3. The Income Theory= seeks to explain that changes in the value of money are caused by changes in
prices in terms of profit expectation, savings, investments and money income.
Price Determinants: The income theory claims that prices are determined by the following factors.
a. period of production = this refers to the actual length of productive activities take place until such time
the goods are offered for sale in the market. Here, the faster the goods are produced, the lower the
price will go, which will increase the value of money, if the other factor remains the same.
b. volumes of goods & services offered for sale = the greater the quantity of goods and services offered
for sale in the market, the lower the price will go, if the other factor remains constant. But the lesser
the quantity of goods offered for sale, the higher the price will go that will decrease the value of
money.
c. size of the money income of the community = the bigger the size of the money income of the
community, the higher their purchasing power that will create greater demand for goods and services
that will result to an increase in price. But the smaller the money income of the people, the lower their
purchasing power that will command them for a lesser demand for goods and services resulting to à
decrease in price and an increase in the value of money
d. what income receivers actually do with their money income = everyone spends at least a part or his
income and he saves the rest of his income if any. propensity to consume- the keenness of a person to
consume. propensity to save - keenness to save.
Here, the more an individual spend and the lesser he saves or his income, the more he demand for
goods and services that will result to an increase in price; but the more he saves and the lesser he
spends of his income, the lesser he demands for goods and services that will result to a fall in price.
e. velocity of income - the faster the velocity of money, the higher the price will go; but the slower the
velocity of money, the lower the price will go.
4. Cash- Balance Theory = this theory considers the supply of money as the average quantity of money which
is held in the "cash balance” of the people that is available for spending purposes. It puts heavy emphasis on
the relationship or demand and supply at any given time. Here, the sum of these balances is equal to a certain
fraction of the purchasing power of the people sufficient to buy all the goods and services offered for sale in
the market.
G. DEVALUATION DEFINED:
DEVALUATION= actually changes the value of the currency in relation to other currencies. It is a measure
adopted by a country that desires exports, a t the same time decrease imports, and improve the level of
international reserves.
DEVALUATION = refers to the voluntary reduction in the gold content of the monetary unit as determined by
law. It also applies to the lowering of value of the country's currency in terms of currencies of other countries.
PURPOSES & DESIRED EFFECTS OF DEVALUATION:

1. domestic price increase = if the value of money is decreased e prices or goods and services are high,
hence, and effect of devaluation.

2. increase in domestic production of exportable goods = any increase in prices encourages businessmen
to increase their production and here, the devalued currency becomes cheaper, thus it would be
cheaper for then to buy the exportable goods.
3. increased level of employment- when the demand for domestic products Is increased, employment
will also rise as production increase.
4. increase in national income and government revenue- any increase in the level of employment
naturally will increase the number of people who will be paying their taxes to the government, hence,
and increase in the national income through income taxes as well as business taxes paid by the
employed individuals.
5. favorable balance of trade and a favorable balance of payments- these are the natural results or the
increase in domestic production of exportable goods. Here, the cheaper the devalued currency, the
greater the demands for the goods to be paid in terms of the devalued money, thus, and increase in
exports or them devaluating country is realized and so its balance of payments will be favorable.
6. increased level of international reserves- as long as the devaluing country is able to sustain a favorable
balance of payments equilibrium, international reserves will grow.
MEASUREMENT OF THE VALUE OF MONEY: The movement of the change in the value or money can be easily
determined by the movement of prices, however, to measure the extent of any change in the value of money
is a problem. In this topic, we will come to know a device, which have been constructed but is accuracy and
dependability rests entirely on the reliability or the gathered information.

THE USE OF INDEX NUMBERS: The use of index numbers is one of the studies made on how to measure the
changes in the purchasing power of the money within the country.

Index Number= refers simply to a number adopted to indicate the increase or decrease or a magnitude not
susceptible to accurate measurement. It is also used to measure the change in some quantity which we
cannot observe directly. This refers to figure that discloses the relative change in the prices, costs or other
measurable phenomena between one period and another period of time. These are used to represent the
general price level for any given year or time period as compared with the general price level for any given
year as of a given base year which is represented by 100.