Money

(Macro-economics)
 Barter exchange

Barter system was a system in which goods were

exchanged with goods.

An economy with exchange of goods is called a barter

economy or C-C economy where C stands for
commodities
 Limitations of barter
exchange
Lack of double coincidence of wants

Lack of common measure of value—Proper valuation not

possible

Lack of store of value --- Goods tend to lose value when

stored.Lack of storage for some items is also an issue

Lack of transfer of value

Lack of standard of deferred payments or contractual payments—

No concept of EMI or interest
 Money
Definition
• A medium of exchange.
• With the help of money any exchange of goods and
services can take place.
• Money is said to be the most liquid asset among all
the assets of a man.
• It has general acceptability as a means of payment
and liquid characteristic. Keynes called this
Liquidity preference.
 Meaning of money

Money is anything which is generally accepted as a

medium of exchange,acts as a measure of value,store of
value and means for standard of deferred payments
 Medium of exchange(Primary
function)
It can be used to make payments for transactions of
goods and services because it has the quality of general
acceptability

Double coincidence of wants is removed .

Person can buy and sell goods at any time and place
with the help of money
 Measure of value(Unit of
value/account) –Primary function
Value of goods and services are expressed as a common
unit.

Common unit of measure of value in India is Rupee and

in USA the common unit of measure is dollars.

It provides easy maintenance of business accounts.

 Store of value(Secondary
function)

It is a secondary function of money.

Money as store of value means that money can be stored for use in future.This
function is also known as asset function of money.
In barter system it was difficult to store the value in terms of goods since
goods are perishable and need much space

It is available in fractional denomination ranging from Rs 1 to Rs 2000.It has

merit of general acceptability.It remains relatively stable to other goods.It is a
liquid asset and is more secure in terms of goods
 Standard of deferred
payments-secondary function
of money
It is a subsidiary function of money.It has simplified
borrowing and lending .It has led to creation of financial
institutes.
Money is unit in terms of which debts and future
transactions can be settled.
 Transfer of value(secondary
function

Goods and property etc can be transferred from one

place to another with help of money.
Money has promoted both consumption expenditure and
investment expenditure.

Global economy has come into existence.Money has

expanded across international borders
Money
 Money
• Generally money is created by the Central
Bank or the Government of a country.
• These are legal tender money as there is
legal compulsion for their acceptance.
• They also called as Cash Money.
• Another considerable flow of money is Credit
Money—created by the commercial banks by their
loan transactions
Cash Money Vs Credit Money
 Money
• Money is regarded any object which is
generally accepted as:
• medium of exchange
• unit of account i.e. common measure of value
• standard of deferred payment
• store of value
• transfer of value.
Money
Functions Of Money
Money
 Primary Functions
• As medium of exchange, money is used as a means
of payment.
• As money has ready purchasing power, it facilitates
in transacting exchange of goods and services with
minimum effort and time.
 Primary Functions
• As unit of account, money is treated as common
measure of value.
• value of all goods and services in exchange can be
expressed in terms of money.
• Such expression gives rise to price system in which
money act as a means of calculating the relative
prices as absolute prices of goods and services.
Unit Of
Account
 Secondary Functions
• As standard of deferred payment, money
can be used in the settlement of debt and future
payments.
• Loans are advanced and future contracts
are settled in terms of money.
 Secondary Functions
• As store of value, money is hold as an asset in
liquid (or cash balance) to use anytime in future.
• This is because money has purchasing power
which holds commands over goods and services
all time – at present and in future.
• However use of money as store of value is not
without drawbacks. Changes in general price
level causes rise and fall in the value of money.
When price level rises, value of money falls and
vice versa.
As Store of Value
 Secondary Functions
• As transfer of value, sale and purchase of
movable and immovable assets, paper wealth
and physical wealth can be made with the help
of money.
• Thus, value available in the form of asset
can be transferred from one person to
another with the use of money.
As Transfer of Value
 Value Of Money
• It means Exchange Value.
• It implies how much of goods and services can
be obtained in-exchange of a unit of money.
• Value of money is inverse of price.
• When price level increases, the value of
money decrease and vice versa.
Exchange Value
 Forms of Money
• The total money supply of a country
can broadly be classified into two groups —
• Cash Money and Credit Money.
• It also includes all other financial assets.
• The degree of moniness varies widely
from asset to asset.
 Characteristics of
Money

Currency notes are issued by RBI but coins are issued

by Ministry of Finance.

Cheques and demand drafts are almost perfect

substitutes for money
 Features of money
Liquid asset

General acceptability

Medium of exchange

Means and not an end

 Near Money
Near money or quasi money are time deposits,LIC
policies,bills of exchange.

Moving from store of value into a medium of exchange

in a short period without loss in their face value
 Types of near
money
Bonds,securities and debentures---Bonds are issued by govt and debentures are loan papers issued by
companies.They are near money since they can be converted into cash within a short period of time.They are
sold and purchased in the money market

Bills of exchange---It is a negotiable instrument.It is drawn up by an individual or a firm to pay a stated money
on a specific date which is not more than 90 days.Bills of exchange is near money and can be converted into
money on the due date.Owner of bills of exchange can easily convert into money by receiving less money than
its face value or can encash by deducting a certain amount of discount.

Treasury bills--- Issued by govt and is a promise by the govt to pay a stated amount in 30,60 or 90 days. Issued
at par at say Rs 100 but discounted at say 95 when sold to public.

LIC policy

Travellers cheques
Cash Money and Credit Money
The Components of Money Supply
 Forms of Money
• In modern monetary transactions, the total
stock of money or money supply includes
the following:
• Metallic money or currency coins
• Standard or Full-bodied Coins.
• Token coins
• Paper Money Or Paper Currency
• Credit Or Bank Money
Paper Money & Currency Coins
 Metallic Money Or Currency Coins
• It refers to the coins made out of metal like
gold, bronze, silver, copper, nickel.
• Standard or Full-bodied Coins are those coins
whose face value is equal to its intrinsic
(metallic) value.
• Token coins have intrinsic (metallic) value less
than its face value.
• They generally are of lower denominations
are made of cheap metals like nickel and copper.
• Token coins are used for exchange of small value.
Metallic Money Or Currency Coins
Standard or Full-bodied Coins.
 Paper Money Or Paper Currency
• Paper money consists of currency notes
issued by the State Treasury or the Central
bank of the country.
Paper Money Or Paper Currency
 Credit Or Bank Money

• Bank demand deposits withdraw-able by

issuing cheque has started functioning as
money, and cheque are conventionally
accepted as a means of payment by the
business community in general.
Credit Or Bank Money
 Legal Tender And Conventional Money

• In modern era, currency money and bank

money together constitute the total stock of
money or money supply.
• Currency money (both currency coins and
currency notes) is legal tender money or fiat
• money and has general acceptability.
• Credit money or bank demand deposits are
conventional money and lacks general
acceptability.
Legal Tender And Conventional Money
Gresham’s Law