Ch-5 Money - Revised
Ch-5 Money - Revised
Ch-5 Money - Revised
Barter is best?
Only Individual: In an economy which consists of only one individual there cannot be any exchange
of commodities and hence there is no role for money.
Family at Island: Even if there is more than one individual but these individuals do not take part in
market transactions, example: family living on an isolated island, money has no function for them.
More than One: However, as soon as there is more than one economic agent who engage
themselves in transactions through the market, money becomes an important instrument for
facilitating these exchanges.
Double Coincidence of want: It refers to the immediate fulfillment of each other wants. An example
suggests that “wheat may be exchanged for cloth; house for horses, etc., or a teacher may be paid
wheat or rice as a payment for his/her services.” All are the example of double coincidence of wants.
However in real life, it is very difficult to find the double coincidence of want. It leads to huge cost and
time. For the understanding of the concept better, solve the puzzle in picture.
5.1 Money | P A n a n d A c a d e m y | M o n e y
Limitation of barter Exchange
1) Lack of Double Coincidence of want: Let you aware about the facts:
It works only when both buyer and seller are ready to
exchange each other's goods. A barter system is an old
It is very rare in real life. method of exchange.
It is difficult to find such a person every time. In barter system, This system has been used for
exchange becomes quite limited and increases trading cost. centuries and long before
Double coincidence of wants means that goods in possession of money was invented. People
two different persons must be useful and needed by each exchanged services and goods
other. It is the main basis of barter system of exchange. But it is for other services and goods in
rare. return.
3) Lack of standard of Deferred(Future) Payment: Due to following Due to lack of money, bartering
reason: became popular in the 1930s
Goods which need to be repaid might lose or gain its value at during the Great Depression. It
the time of repayment. Hence, it leads to conflicts at the time was used to obtain food and
of repayment. various other services. It was
done through groups or between
people who acted similar to
4) Lack of store of value:
banks. If any items were sold, the
Difficult for the people to store value as most of the goods owner would receive credit and
don’t posses durability. the buyer’s account would be
In reverse it can degrade the value of the goods. debited.
Most of the goods like wheat, rice, cattle etc. are likely to
deteriorate with the passage of time or involve heavy cost of
storage.
5.2 Money | P A n a n d A c a d e m y | M o n e y
What is Money?
Money is anything which generally accepted as a medium of exchange, measure of value, store value
and means for standard of deferred payment.
Term money is used to cover all such things like coins, paper notes, cheque, demand draft etc. Money
can be any commodity chosen by common consent, by the people of country as an instrument of
exchange.
Money has overcome the drawbacks of Barter System:
Medium of Exchange.
Measure of Value.
Store of Value.
Standard of Deferred Payment.
5.3 Money | P A n a n d A c a d e m y | M o n e y
What is Money Supply?
It refers to total volume of money held by public at a particular point of time in an economy.
4) M4
M4 = M3 + Total deposits with POSB (Excluding NSC)
5.4 Money | P A n a n d A c a d e m y | M o n e y
Cash reserves with Banks
Money consists of currency and demand deposits, while HPM consists of currency and cash
reserves with banks.
Function of money
Primary Function: Most important function of money, which must perform in every country.
Medium of Exchange;
Measure of Value.
Secondary Function: Functions which are supplementary to main function. Also known as
'Derivative function'.
Standard of Deferred Payment
Store of value (Asset Function of Money)
Primary function or Main function: Primary function includes the most important functions of money,
which it must perform in an economic system irrespective of time and place. The following two
functions are included under this category.
a) Medium of exchange
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”.
b) Measure of value /unit of account
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.
Money works as a common denominator into which the values of all goods and services are
expressed.
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.
Secondary Functions
c) Standard of deferred payments
Credit has become the life and blood of a modern capitalist economy.
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.
It has become possible because money has general acceptability, its value is stable, and it is
durable and homogeneous.
d) Store of Value
Wealth can be conveniently stored in the form of money. Money can be stored without loss in
value.
In this way, money acts as a bridge between the present and the future.
Money means goods and services. Thus, money serves as a store of value.
It is also known as asset function of money.
5.5 Money | P A n a n d A c a d e m y | M o n e y
Characteristics or features of money
a) Durability: Money must be durable and not likely to deteriorate rapidly with frequent handling.
Currency notes and coins are being used repeatedly and shall continue to do so for many years.
b) Medium of exchange: Money is the thing that acts as a medium of exchange for the sale and
purchase of goods and services.
c) Weight: Money must be light in weight. Paper money is better than metal coins because it is light in
weight.
d) Measure of value: It not only serves as medium of exchange but also acts as a measure of value. The
value of all the goods and services is expressed in terms of money.
5.6 Money | P A n a n d A c a d e m y | M o n e y