The Nature & Function of Money

The simple definition of money
Any thing that is generally acceptable as a means of exchange and that at the same time acts as a measure and store of value is money. Money is anything which is widely accepted in payment for goods, services or discharge of other kind of business obligations

Approach  Money ……………… M  Currency…………….. C  Demand Deposits……DD  Time Deposits………. TD M = C + DD + TD A temporary abode of purchasing of power by being held in the form of currency

Liquidity Approach
Gurley and Shaw given the liquidity approach
The assets which are close substitutes of money and can be converted into money quickly have been included in the character of money. Thus money is equal to Currency+Demand Deposit+Time Deposits+ Saving Bank Deposits+Shares+Bonds

Near Money & Money Substitutes
The assets which can be easily and quickly converted into money without loss are called near money or money substitutes These are the debts of financial institution or federal government. Saving Deposits-Shares-Claims-Treasury BillsBill of Exchange Are Near Money or Substitutes.

Comparison
Money
Currency notes Coins Demand Deposits

Near Money
Bill of exchange Government Securities Saving and time deposits

Liquid Money
Money that is perfectly liquid
These are claims to money and may be readilly converted into cash. Government Deposit Certificates Treasury Bond Company Shares

Yield
Interest Profit in shape of revenue to holder It is an income earning assets.

Standard Unit
It is a standard unit of account where all prices are standard in money terms. It has no power to act as a Money.

Importance in Economey

Money bewitches People and people do almost anything for money. Whereas money will do almost anything for people. It is the money which feeds you, clothes you, shelter you, amuses you, helps you in trade and industry

Money & Price Mechanism
All incomes and price measured. Economics decision of what, where and hot to produce are implemented through

Importance in Production
Procurement of Material Combine different factors of production and make payment against the factors Cost of production, lending, borrowing, pricing, profits,

Importance in Consumption Importance in Trade Importance in distribution Saving and investment Money and Public Finance Social Importance Political Progress Index of Growth

Origin and Growth
Money is develop of necessity. It took long process of evolution since Adam and Eve and reach to this modern complicated system. Money is discover to remove difficulties of direct exchange of goods for goods and to serve as a unit of account an medium of exchange Money early shape is cows, goats, fish, battle axes, knives, arrows, furs, wheat these have storage, durability, divisibility, malleability, homogently and transportation problem

The Next Step of Development
Search for better form to ease difficulty of first stage lead to discovery of precocious metals gold, silver & copper.  It has the difficulties of weight measures and value.  Transportation of precious metal in shape of money was dangerous.  No guarantees of weight from competent authority With the passage of time these full bodied coins also proved a failure as good for medium of exchange

Paper Money
 

Origin of paper money can be traced to the receipt of goldsmith which they issue to ther clients. Receipt that had the weight and the value of the goods deposited by the clients with goldsmith who duly endorse and authenticate. These receipts become the credit instruments and were freely used for making payments. 19th Century is the period when all the commercial banks issued the notes which now called as the paper money.

Money Evolution Stages
Traditional Economy
2. 3. 4.

Animal Money Commodity Money Metallic Money

Modern Economy
6. 7.

Paper Money Credit Money

Functions
      

Static Functions Money is Medium of Exchange Money represent general purchase power Accepted in exchange of goods and services It overcome the defects of barter system Serve the common measure of value. Yardstick of value and commodities Standard of deferred payment when business is done on credit

 

Money has the store value Money serve as the time transfer, place transfer and person transfer of purchasing power. Money is the source of prosperity and crime

But what cannot be purchase and sold through money is love, emotion, brotherhood, natural blessings, life, breathing.

Dynamic functions of money
 

    

Money has the potential to influence the economy It influence the price level, interest rates, profits, utilization of resources Aid to specialization, production and trade Influence Income and Consumption Instrument of making loans and financing Tool of Monetary management Instrument of economic policy

Contingent Function
Distribution of National income  Basis of Credit System  Measures of Marginal productivity and help in equalization of marginal utility in expenditure  Liquidity of property.

Miscellaneous Functions
 

Various option for bearer of money to use it. Judgment of repaying capacity by appraising credit worthiness of a person or country can be easily assessed with money. Determination of solvency by evaluated with the help of measuring rod of money the capacity to repay the debt or not through the assets sale which are owned.

Characteristics of Good Money
General Acceptability A good money that is acceptable to all without any hesitation in exchange for goods and services Stability of Value It should be stable in value Transportability Should be easily transported without any depreciation and should have large value in small bulk

Storeability
Money can be without depreciation and it is not perishable that can loose the shape and face.

Divisibility
Money is capable of being re-united without losing its value and can be divided into different values.

Homogeneity
It is in uniform quality and capable to standardization

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