The Concept of Near Money

THE CONCEPT OF NEAR MONEY 

Strictly speaking money includes the currency notes and coins which are legal tender and perfectly liquid. However besides these, there are number of other assets that can be converted into cash with reasonable certainty and without, loss of value. Such assets are called Near Money*'.

Near Money is not perfect money but something adjacent to it. It possesses certain characteristics of perfect money and can be converted into money easily.

In practice near money is such assets that are called M2 and M3 (see question on Definition of Money). A characteristics of near money is that mostly they are interest earning assets.

Difference between Money and Near Money

Following are the points of differences between money and near money.
Money                                                                                                           Near Money

1. Interest Earning

No interest is earned on it. Its value is     Interest is earned on near money that is

affected by the rate of inflation. If the     why when interest rates are high there is a

general price level increases the value of          tendency to hold wealth in form of near

liquid money falls. On the other hand if   moneys. The rate"  of inflation however

there is an appreciation in the exchange  affects the real rate of interest. Due to

market, the value of money increases.      increase  in  the  rate  of inflation  real

interest rate decreases.

2. Content

It is denoted by Ml and includes currency, It includes M2 + M3 (fix deposits, bearer
coins.                                                               certificates, bonds etc.)

3.  Liquidity

It is perfectly liquid. It is the most readily It can be used as money but it is not
available source to pay off any business perfectly liquid. It has to be converted into
obligation                                                        cash before using it for any general

purpose.

4. Legal Tender

Money  (currency  and   coins)   are   legal   This is not a legal tender. The creditor can
tender. These can be used to discharge any   refuse to take payment in the form of near
»amount of business obligations.                 money.

5. Standard Unit

This is a standard unit. All prices, debts,  This is not a standard unit. It cannot be

amounts are stated in it. Further the estimate    used  to   state  value  of any  assets  or

of likely liabilities  and  future  economic           estimate of any liability
benefits can  also  be stated  in terms of money.