MONEY

Rajinder PrasadPGT (Economics)K.V Dungarpur

Barter System and Its Difficulties

Barter system means the direct exchange of one commodity for another.

Difficulties of Barter System –1. Lack of double coincidence2. Lack of divisibility3. Lack of common measure4. Difficulty of storage and transfer of wealth5. Difficulty in deferred payments6. Difficulty in the exchange of services

Meaning of Money According to Walker, “Money is what money does.” In the opinion of Robertson, “Money is anything

which is widely accepted in payment for goods, or in discharge of other kind of business obligations.”

According to Crowther “Money is anything that is generally accepted as a mean of exchange and at the same time, acts as a measure and as a store of value.”

In simple words Money is anything which

performs the four main functions : medium of exchange, measure of value, standard of deferred payments and store of value.

Functions of Money

Primary Functions

Secondary Functions

Medium of Exchange

Measure of Value

Standard of Deferred Payments

Store of Value

Transfer of Value

Functions of Money1. Medium of Exchange – It is a very important function of money. Any

commodity cab be purchased or sold through the medium of money. In other words, money becomes the representative of general purchasing power.

2. Measure of Value – Money serves as a common measure of value or a standard of value. Value of all goods and services are expressed in terms of money. Thus, a very important function of money is to serve as a unit of value.

3. Standard of Deferred payments – Money serves as the measure by which the value of future payments is regulated. Future payments can not be made in terms of physical goods because the value of these goods is liable to change. Therefore money is used as standard of deferred payments.

4. Store of Value – Though wealth can be stored in the form of physical goods, people like to hoard it in the form of money. It is the most economic and convenient way of hoarding. A store of value implies the shifting of purchasing power from present to the future. Thus, money provides the link between present and future.

5. Transfer of Value – Money helps us to transfer value from one person to another and from one place to another. Money is readily accepted by all, and in all places.

Supply of Money The supply of money refers to the amount of money

held by the public in an economy at any given time.• Traditional or Narrow Approach – According to

narrow approach, all the assets which performs the function of medium of exchange are included in the supply of money. It includes – (i) Currency money (ii) Demand deposits of commercial banks.

Or M = Coins + Currency notes + Demand deposits

Currency Money:- is termed as fiat money, which means that currency notes and metallic coins serves as money on the basis of the fiat (i.e. order) of the govt.

Demand deposits of commercial banks:- Bank’s demand deposits are referred to as money supply because they are transferable by cheques in in the settlement of debts.

Modern or Broader Approach The broader approach of money supply is based on the

liquidity approach and stresses the store of value function of money. The RBI provides measures of money supply in the country in accordance with both narrow as well as broader approach. RBI has adopted four measures of money supply. Which are as follows –

1. M1 = C + DD + OD 2. M2 = M1 + Saving deposits with post office saving banks 3. M3 = M1 + Time deposits of all commercial and cooperative banks 4. M4 = M3 + total deposits with the post office saving organisation

QUESTIONS

• 1. What is Barter System?• 2. What do you mean by double co-incidence of wants?• 3. How the money solve the problem of double co-incidence of wants?• 4. What is money?• 5. What are the Primary functions of Money?• 6. What do you mean by supply of money and

what are its sources?