Chapter 5 Money class 12th Commerce

Money

Money is anything which is generally accepted as a medium of exchange , measure of value , store of value and means for standard of deferred payments .

 

Barter system refers to exchange of goods for goods.

Limitation of barter exchange

• Lack of double coincidence of wants
• Lack of common measure of value
• Lack of standard of deferred payments.
• Lack of store of value

 

1. Lack of double coincidence of wants

Barter system can work only when both buyer and seller are ready to exchange each others goods ……

2. Lack of common measure of value

In the barter system all commodities are not of equal value and there is no common measure of value of goods and services in which exchange ratio can be expressed.

3. Lack of store of value

 

Under barter system it is difficult for people to store wealth for future use because:

• Most of the goods (like wheat , rice, vegetables etc.)donot posses durability , ie. Their quality deteriorates with passage of time.
• Storage of goods requires time and efforts .
• As a result good cannot be used to store the earning for a long  period .

 

4. Lack of standard of deferred payments

Under barter system contract involving future payment or credits transaction cannot takes palce because of following reasons :

• The borrower may not be able to arrange goods of exactly same quality at the time of repayments.
• There may be conflicts reagarding which specific commodityis to be used for repayments .
• The commodity to be repaid may lose or gain its value at the time of repayments .

      So, it is very difficult to make deferred payments in the form of goods .

 

Functions of money

1. Primary function
2. Secondary function

1.medium of exchange

2. measure of value

1. Standard of deferred payment
2. Store of value

 

1. Primary function

1. Medium of exchange

Money as a medium of exchange can be used to make payments for all transactions of goods and services.
• Money when used as a medium of exchange helps to eliminate the basic limitation of barter trade, that is, the lack of double coincidence of wants.
• Individuals can exchange their goods and services for money and then can use this money to buy other goods and services according to their needs and convenience.
• Thus, the process of exchange shall have two parts: a sale and a purchase.
• The ease at which money is converted into other goods and services is called “liquidity of money”.
 

2. Measure of value

Money works as a common denominator into which the values of all goods and services are expressed.

 • Another important function of money is that it serves as a common measure of value or a unit of account.
• Under barter economy there was no common measure of value in which the values of different goods could be measured and compared with each other. Money has also solved this difficulty.
• As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.” Money measures the value of economic goods.
• When we express the values of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them.

 

1. Secondary function
2. Standard of deferred payments

Money as a standard of deferred payment means that money act as a standard for payments which are to be made in future.

• In millions of transactions, instant payments are not made.
• The debtors make a promise that they will make payments on some future date. In those situations, money acts as a standard of deferred payments.
- the standard of deferred payment of simplified the morning in lending operations what has led to the creation of financial institutions
 

2. Store of value:

Money is a way to store wealth. Although wealth can be stored in other forms also but money is most economical and convenient way to provide security to individuals to meet contingency and predictable emergencies and to pay future dates. In barter it was difficult to do that.

 

Money supply

Money supply refer to total volume of money held by public at a particular point of time in an economy.

 

Measures of money supply

• M1
• M2
• M3
• M4

1. M1

 

M1=currency and coin with public+ demand deposits of commercial banks+ other deposits with rbi

That is

• M1= Currency and coins with public + Demand deposit of commercial bank + Other deposits with reserve bank of india
• Currency and coins with public
• Currency and coin with public

it consist of paper notes and coin held by the public remember, any urrency held with the government and banks is not be included.

• It includes coin of demonetization of rs 10, 5 ,2 , 1 , etc.. and paper notes of demonetization like

(2000, 500, 100rs )

• It also termed as legal tender money as it can be legally used to make payments of debts or other obligations.

 

• Demand deposit of commercial bank
• Demand deposits of commercial banks

It refers to demand deposits of the public with the commercial bank , demand deposits are the deposits which can be encashed by issuing cheques at any time by the account holder. A demand deposits is treated as equal to currency held as it readily accepted as a mean of payments.

• Other deposits with reserve bank of india

It includes deposits held by the RBI on behalf of foreign banks and governments , world bank , IMF etc.. however it does not include deposits of the Indian government and commercial bank with RBI.

 

2. M2

M2= m1 + saving deposits with post office saving bank

 

3. M3

M3 = m1 + net time deposits with banks

 

4. M4

M4 = m3 + total deposits with post office saving banks