Money

(Part-I)
By
Dhyani Mehta

Need of Money
Necessity of money arise from the
difficulty faced in barter system.
The main incontinency in barter
system were:
Lack of people with similar wants.
Lack of common measure of value.
Lack of subdivision.
Difficulty to store wealth.
Difficulty in exchange of services.

Definition of Money

Money is a commodity chosen by

common consent to be measure of
value and means of exchange between
all other commodities.

Function of Money
There are three function of money:
Primary function or Original function
Secondary function
Contingent function

Primary Function of Money

Medium of Exchange:
Money work as common medium of
exchange for all the commodity.
It has removed the problem of barter
system of exchange and dual want.

Measure of Value:
Money acts as measure or standard of
value.
Money act as measure for valuing the
goods and services.

Secondary Function
Standard of differed payment:
Money servers as standard of differed payments
Money facilitates credit transection and acts as
unit for future for debt and future transection.

Store of Value:
Money can be stored more conveniently and
safely than any other commodity.
Storing of money does not need more space.
It is commonly excepted and its value change is
very small over the time.

Secondary Function
Transfer of Value:
Money act as transfer of value from one
person to another person with help of
different instruments like Cheques and
DD etc.
Because it is commonly accepted
commodity.

Contingent Function of
Money
Means of Measurement and Distribution of National
Income:
It is possible to measure the national income like GDP in
value terms which was not possible in barter system.

Money Equalises Marginal Utilities- Productivities:

Money helps both Consumer and Producer to maximise
their satisfaction.
The customer can equalise the marginal utilities of
different commodity by purchasing it with the help of
money Consumer Surplus.
Producer can equalise productivity by purchasing factor
of production by minimizing cost and maximizing profit.

Money and Money Near

Money:
It is a financial assets which is directly
accepted as means of payment.

Money Near:
Some financial assets are like money.
They do not command complete
liquidity like money command.

Money Near
Examples of Money near are:
Time Deposit
T-Bills
Bills of Exchange
Deposit of Postal Saving
NSEs
Travellers Cheques etc.

Difference Between Money and

Money near
Money

Money Near

Money Performs the

function of medium of
exchange and
generally
acceptability.
Money includes
currency notes, coins,
Demand deposits etc.

Money Near is not

means of payment it
has to be converted
into money and than
used as means of
exchange.
Money near includes
time deposit, bill of
exchange, govt.
bonds, shares etc.

Difference Between Money and

Money near
Money

Money Near

Money have complete

liquidity is readily and
immediately accepted.
Holding money is
called cash balance
and it does not earns
any interest.

Money near lack of

this kind of liquidity.
Holding money near
earns the interest.

Money Supply
Money supply has two main
components ;
Currency Money ( Coins, Currency notes
in circulation)
Demand deposits of the commercial
banks.

Factors Effecting Money

Supply
Bank Credit to the government or
government borrowing from the
banking sector:
Government borrow from banks to
finance its deficits which will increase
money supply with public.

Bank credit to private sector:

By giving loans to the private sectors
will increase the money supply in the
economy.

Factors Effecting Money

Supply
Balance of payment Situation:
Favourable Balance of payment will
money supply increases.
Unfavourable balance of payment will
reduce the supply of money.
But when unfavourable balance of
payment is sponsored by external
support the money supply will not
reduce.

Factors Effecting Money

Supply
Velocity of circulation of money:
By velocity of money we mean how
many time the a unit of money circulate
in the economic system.
Total Money Supply= MV+MV
M=Coins, Paper note etc.
V= Velocity of circulation.
M=Credit money and bank Money
V=Velocity of credit money and bank
money.

Thank You