Ease of Specialization:
Barter was characterised by the phenomena of self sufficiency which was inefficient. The invention of money led to specialisation. Specialisation makes people and [Mtions to do what they can do relatively well and effectively. Specialisation not only helps in reducing cost of production but also results in higher production. The increase in the production, then, can be traded to buy other goods.
10. Foreign Investment:
Money has made possible the huge foreign investment in today's world. Under barter system, investment was fairly impossible. But with the invention of money people M different new modes of making investment.
11. Measurement of Efficiency:
Under barter, there was no standard of measuring efficiency and productivity. However, this problem was solved by money. Now we can measure output, costs and efficiency in definite monetary units and can take long term decisions on the basis of such measurements,
Summing up:
It can be easily judged that there were many difficulties in the barter system of le. The invention of money removed almost all of these difficulties and showed the rid a path of rapid economic activity and liberalisation
Saturday, February 20, 2010
Concept of Money
Money is something by which we are all aware. We know it, recognise it and use widely in our everyday life. Yet most of us do not know what exactly money is and v it is defined.
Defining Money:
To define money is complicated. This is because money is not only a name of any •atenal but it also comprises certain attributes and prcviliges. There are certain attributes Dualities which make something "money". To define money we have different approaches.
General Acceptability:
This approach says that anything which is generally acceptable for payment of •pods is called money."Money is anything that is generally acceptable in payment for^ goods and in discharge of all Vin,1, of business obligations escriptive Approach:
This approach says that besides acting as a generally acceptable thing, money must have certain other qualities as given below.
crowther Says:
"Money is anything that is generally acceptable as a means of exchange and at the same time acts as a measure and stock of value."
Legal Aspect:
J.M. Keynes was the first to emphasize on the legal aspect of money.
"Money itself is that by delivery of which debt contracts and price contracts are discharged and in the shape of which general purchasing power is held."
What is said in the above three definitions can be summed up in the famous saying.
Money is a matter of functions for a medium, a measure, a standard, a store.'" In other words money' can also be defined as "Money is what money does." Alternative Approach:
An alternative approach to define money is to take account of what constitutes money or what are the components of money.
Generally there are three components of money which are explained below. Traditional View (M1)
According to Traditional view, money consists only of currency and demanddeposits. Thus Ml = C + D
C - Currency that includes notes and coins which are the debts of government D = Deposits of banks on whom cheque can be drawn. Monetarist View (M2)
It includes saving and time deposits. This means that this view takes a broader definition of money. The saving and time deposits are not perfectly liquid so they are called near money (explain in next question)
So
M2 = Ml + Savings deposits + Fixed deposits Liquidity Approach (M3)
This is even a much broader definition of money taking into account different current assets. •M3 .= Ml + M2 + Saving scheme deposits + bearer certificates.
Other Definitions:
According to N.HALM:
"The word money has been used to designate the medium of exchange as well as the standard of value."
According to R.P KENT:
"Money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value"
According to KNAP:
"Any thing which is declared as money by the government becomes money".
According to ROBERTSON:
"Money is any thing which is generally accepted in payment for goods or in discharge of other kinds of business obligations".
Conclusion:
Summing up the above definitions and views, we can say that money is any thing that can act as a medium of exchange, and as a measure , store and unit of value. In other words, it can also be said that:
0! money! You are not my god but by God you fulfil my each desire. Or you can also say "Money is Honey".
Defining Money:
To define money is complicated. This is because money is not only a name of any •atenal but it also comprises certain attributes and prcviliges. There are certain attributes Dualities which make something "money". To define money we have different approaches.
General Acceptability:
This approach says that anything which is generally acceptable for payment of •pods is called money."Money is anything that is generally acceptable in payment for^ goods and in discharge of all Vin,1, of business obligations escriptive Approach:
This approach says that besides acting as a generally acceptable thing, money must have certain other qualities as given below.
crowther Says:
"Money is anything that is generally acceptable as a means of exchange and at the same time acts as a measure and stock of value."
Legal Aspect:
J.M. Keynes was the first to emphasize on the legal aspect of money.
"Money itself is that by delivery of which debt contracts and price contracts are discharged and in the shape of which general purchasing power is held."
What is said in the above three definitions can be summed up in the famous saying.
Money is a matter of functions for a medium, a measure, a standard, a store.'" In other words money' can also be defined as "Money is what money does." Alternative Approach:
An alternative approach to define money is to take account of what constitutes money or what are the components of money.
Generally there are three components of money which are explained below. Traditional View (M1)
According to Traditional view, money consists only of currency and demanddeposits. Thus Ml = C + D
C - Currency that includes notes and coins which are the debts of government D = Deposits of banks on whom cheque can be drawn. Monetarist View (M2)
It includes saving and time deposits. This means that this view takes a broader definition of money. The saving and time deposits are not perfectly liquid so they are called near money (explain in next question)
So
M2 = Ml + Savings deposits + Fixed deposits Liquidity Approach (M3)
This is even a much broader definition of money taking into account different current assets. •M3 .= Ml + M2 + Saving scheme deposits + bearer certificates.
Other Definitions:
According to N.HALM:
"The word money has been used to designate the medium of exchange as well as the standard of value."
According to R.P KENT:
"Money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value"
According to KNAP:
"Any thing which is declared as money by the government becomes money".
According to ROBERTSON:
"Money is any thing which is generally accepted in payment for goods or in discharge of other kinds of business obligations".
Conclusion:
Summing up the above definitions and views, we can say that money is any thing that can act as a medium of exchange, and as a measure , store and unit of value. In other words, it can also be said that:
0! money! You are not my god but by God you fulfil my each desire. Or you can also say "Money is Honey".
Money Concept with Details
Store of Value:
By working as a store of value money removed the inconvenience of "lack of store of value". Now wealth can be stored in form of bonds, share certificates etc. which are though not perishable yet open to hazards of inflation.
3. Price Mechanism:
Money established the price mechanism all over the world. By this, it removed the inconvenience of "no measure of value". The price mechanism then gave rise to market forces of demand and supply which today form basis of almost every economic model.
4. Credit and Advances:
Money can be advanced at interest. Thus money has removed the inconvenience
of "no Standard of deferred payment'* Now loans can be taken from banks and financial institutions, debt and long term payments can be stated in terms of money.
5. Banking Institutions:
Money has greatly helped in the establishment, working and development of all banking and monetary institutions. The whole banking structure is built on the basis of money. It also plays an important role in the working of money and capital markets. It can be rightly said that banks are such institutions which are working just because of the simple reason that man has invented money.
6. Investment & Savings:
Money has made it possible and extremely easy to invest and save. Now we can save our wealth by investing it in different saving schemes. Besides this wealth can also be stored in the form of foreign exchange, gold, silver etc. "which can be conveniently converted into currency.
7. Public Finance/Government Revenues:
Money has greatly helped the accounting of public finance, tax revenues and government revenues etc. It has facilitated the government borrowings and spending. It is also the basis for working of national financial institutions.
8. Liquidity to International Trade:
Money has provided the much needed liquidity to international trade. Under barter, it was not possible to trade effectively with foreign countries. There were no appropriate means of making foreign payments. Neither there was any suitable exchange system nor was any policy for valuation of foreign goods. Money, however, removed these difficulties. It helped in establishing exchange system throughout the world which greatly facilitated the international trade.
By working as a store of value money removed the inconvenience of "lack of store of value". Now wealth can be stored in form of bonds, share certificates etc. which are though not perishable yet open to hazards of inflation.
3. Price Mechanism:
Money established the price mechanism all over the world. By this, it removed the inconvenience of "no measure of value". The price mechanism then gave rise to market forces of demand and supply which today form basis of almost every economic model.
4. Credit and Advances:
Money can be advanced at interest. Thus money has removed the inconvenience
of "no Standard of deferred payment'* Now loans can be taken from banks and financial institutions, debt and long term payments can be stated in terms of money.
5. Banking Institutions:
Money has greatly helped in the establishment, working and development of all banking and monetary institutions. The whole banking structure is built on the basis of money. It also plays an important role in the working of money and capital markets. It can be rightly said that banks are such institutions which are working just because of the simple reason that man has invented money.
6. Investment & Savings:
Money has made it possible and extremely easy to invest and save. Now we can save our wealth by investing it in different saving schemes. Besides this wealth can also be stored in the form of foreign exchange, gold, silver etc. "which can be conveniently converted into currency.
7. Public Finance/Government Revenues:
Money has greatly helped the accounting of public finance, tax revenues and government revenues etc. It has facilitated the government borrowings and spending. It is also the basis for working of national financial institutions.
8. Liquidity to International Trade:
Money has provided the much needed liquidity to international trade. Under barter, it was not possible to trade effectively with foreign countries. There were no appropriate means of making foreign payments. Neither there was any suitable exchange system nor was any policy for valuation of foreign goods. Money, however, removed these difficulties. It helped in establishing exchange system throughout the world which greatly facilitated the international trade.
Type of Money
There was not any sudden change from barter to money. In fact this process took a long time. Money itself also went through different stages of evolution and changed different forms. Broadly speaking, there are following different kinds of money.
Commodity money, Metallic money, Paper money, Bank money, Plastic money 1. Commodity Money:
Commodity money can be thought of as the earliest form of the money. In ancient times money was in the form of different goods that were commonly used by people in everyday life. Examples include iron tools, war equipments, swords, knifes^ animal skins, animal teeth, fish teeth, jiets, crops, stones etc. Most of these commodities were non-monopolised in supply and further they were frequently needed by majority of the inhabitants of the society. The supply of these commodities were usually governed by scarcity and cost of production. However, the problem was that different societies were using different goods as money. So, there was no standardised unit of account or meas>"value. Trade among the members of the same society was relatively easy were many hurdles in cross border" trade
Metallic Money:
Metallic money comes next to commodity money. As the name suggest, it consists of different metals such as gold, silver and iron etc. People started using these metals as money because they were scarce. In the modem economy, the coins are the form of metallic money. Metallic money (a coin as they are now called) are of small denomination and their intrinsic value (i.e., the value of metal content) is much lower .than their face value.
Advantages:
1. They can be conveniently kept.
2.They can be rapidly converted into other type of currency.
3. There is no chance of hoarding or melting as intrinsic value of metal is less thanthe face value.
Disadvantages:
1. They are only limited legal tender money i.e., they can only be used to discharge debts of a certain limit, .
Metallic money can be further classified in the following two forms:
(a) Full bodied money: It means that the piece of metal that is used as a money hasthe same intrinsic and face value. Intrinsic value means the value of the content ofpiece of the metal. It can also be called the internal value of the metal piece that isbeing used as money. Face value means the value that a metal piece commandsbecause of the status of being accepted as money. When these two values i.e., theinternal and the face value are same, the money is called the full bodied money.
(b) Token money: It means such a money whose intrinsic value is less than its facevalue. So the value of the material of which the money is made up of is less thanthe value that is inscribed over it. The best example of such money is our coins.You can yourself check that a coin of Rs.2 has the face value of 2 rupees but thevalue of the material of which it is made up of is very less than 2 rupees. Theprocess of converting a metal into coins of particular weight and content is calledcoinage of money. The coinage is mostly done by the central monetary authoritiesor govt. A good coinage system has the following features:
(i) The amount of coins in a society is kept under control by the govt. or monetary authorities.(ii) Coins are of equal weight, shape, colour, size etc. and constant use does not produce any significant change in the shape or appearance
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(iii)Supply is regulated in such a way so as to offset liquidity problems faced by society.
(iv) The govt. seal or stamp is marked on each coin. This makes it recognisable and difficult to be copied.
(v) The volume and weight of coins should be such that people can easilvhandle them. '
(viYou must have noted that mostly we give charity or bus fairs in coins. Further you are well aware that when the shopkeeper is short of change' (notes or coins of small denomination), customer face problem in shopping. So in a good coinage system there must be an ease of liquidity in small
transaction.
Paper Money:
Paper money means the currency notes issued by the central bank of country. The 'f this form of money can be traced back to the receipts issued by goldsmiths for ±c deposits held by them. With the advent of printing press and paper making industry jffper currency became the most economical and famous form of money. This form of nooey is most widely used almost in all parts of world. There are three forms of paper *
a Representative Paper Money:
Representative paper money is one which is fully backed by gold or metallic s. This means that the govt. is :n a position to convert all the notes into gold if thkyt m rresented for conversion at the same time. Receipts issued by the goldsmiths can ofc
.r. as an example of representative paper money. For such type of currency the issuing\ •nfaority always has to hold sufficient amount of gold or other metallic reserves. This tacgs inefficiency in'the use of gold which is the major disadvantage of such a currency.
Convertible Paper Money:
It is such a form of money which can be converted into gold and metallic res:, ves not all the notes issued by the govt. are fully backed by gold. The govt. knows that . mx alt the people will come for conversion at the same time, so all notes though •nrvertible but are not fully backed by reserves. Only a particular amoufit pf gold or Uic reserves are kept which are particular proportion of the value of nofes issued.
Fiat Paper Money:
Fiat paper money is one that we have got in our pockets. Neither it is convertible, rt is fully backed by gold or metallic reserves. If you refcti your 100 rupee note, you
Commodity money, Metallic money, Paper money, Bank money, Plastic money 1. Commodity Money:
Commodity money can be thought of as the earliest form of the money. In ancient times money was in the form of different goods that were commonly used by people in everyday life. Examples include iron tools, war equipments, swords, knifes^ animal skins, animal teeth, fish teeth, jiets, crops, stones etc. Most of these commodities were non-monopolised in supply and further they were frequently needed by majority of the inhabitants of the society. The supply of these commodities were usually governed by scarcity and cost of production. However, the problem was that different societies were using different goods as money. So, there was no standardised unit of account or meas>"value. Trade among the members of the same society was relatively easy were many hurdles in cross border" trade
Metallic Money:
Metallic money comes next to commodity money. As the name suggest, it consists of different metals such as gold, silver and iron etc. People started using these metals as money because they were scarce. In the modem economy, the coins are the form of metallic money. Metallic money (a coin as they are now called) are of small denomination and their intrinsic value (i.e., the value of metal content) is much lower .than their face value.
Advantages:
1. They can be conveniently kept.
2.They can be rapidly converted into other type of currency.
3. There is no chance of hoarding or melting as intrinsic value of metal is less thanthe face value.
Disadvantages:
1. They are only limited legal tender money i.e., they can only be used to discharge debts of a certain limit, .
Metallic money can be further classified in the following two forms:
(a) Full bodied money: It means that the piece of metal that is used as a money hasthe same intrinsic and face value. Intrinsic value means the value of the content ofpiece of the metal. It can also be called the internal value of the metal piece that isbeing used as money. Face value means the value that a metal piece commandsbecause of the status of being accepted as money. When these two values i.e., theinternal and the face value are same, the money is called the full bodied money.
(b) Token money: It means such a money whose intrinsic value is less than its facevalue. So the value of the material of which the money is made up of is less thanthe value that is inscribed over it. The best example of such money is our coins.You can yourself check that a coin of Rs.2 has the face value of 2 rupees but thevalue of the material of which it is made up of is very less than 2 rupees. Theprocess of converting a metal into coins of particular weight and content is calledcoinage of money. The coinage is mostly done by the central monetary authoritiesor govt. A good coinage system has the following features:
(i) The amount of coins in a society is kept under control by the govt. or monetary authorities.(ii) Coins are of equal weight, shape, colour, size etc. and constant use does not produce any significant change in the shape or appearance
Honey Banking & Finance
(iii)Supply is regulated in such a way so as to offset liquidity problems faced by society.
(iv) The govt. seal or stamp is marked on each coin. This makes it recognisable and difficult to be copied.
(v) The volume and weight of coins should be such that people can easilvhandle them. '
(viYou must have noted that mostly we give charity or bus fairs in coins. Further you are well aware that when the shopkeeper is short of change' (notes or coins of small denomination), customer face problem in shopping. So in a good coinage system there must be an ease of liquidity in small
transaction.
Paper Money:
Paper money means the currency notes issued by the central bank of country. The 'f this form of money can be traced back to the receipts issued by goldsmiths for ±c deposits held by them. With the advent of printing press and paper making industry jffper currency became the most economical and famous form of money. This form of nooey is most widely used almost in all parts of world. There are three forms of paper *
a Representative Paper Money:
Representative paper money is one which is fully backed by gold or metallic s. This means that the govt. is :n a position to convert all the notes into gold if thkyt m rresented for conversion at the same time. Receipts issued by the goldsmiths can ofc
.r. as an example of representative paper money. For such type of currency the issuing\ •nfaority always has to hold sufficient amount of gold or other metallic reserves. This tacgs inefficiency in'the use of gold which is the major disadvantage of such a currency.
Convertible Paper Money:
It is such a form of money which can be converted into gold and metallic res:, ves not all the notes issued by the govt. are fully backed by gold. The govt. knows that . mx alt the people will come for conversion at the same time, so all notes though •nrvertible but are not fully backed by reserves. Only a particular amoufit pf gold or Uic reserves are kept which are particular proportion of the value of nofes issued.
Fiat Paper Money:
Fiat paper money is one that we have got in our pockets. Neither it is convertible, rt is fully backed by gold or metallic reserves. If you refcti your 100 rupee note, you
Are you Looking For New Business (Requirments)
Are you looking for new Business you have to Must know Some thing before you start your Business.
All about your Goal Which Business you are Going to start.
Whole Expenditures
Kind of Business
Sole or partnership or joint stock company
kinds of partners
type of societies
Welfare purpose
honesty
staff
Chamber of Commerce
Channel of Distribution
Receipt of inquiry
Taxes
Place of business
Motivates
Slogan
average policy
policy makers
Problems of starting a business
selection of product
demand for the product
provision of capital
size of business unit
degree of risk
capital
All about your Goal Which Business you are Going to start.
Whole Expenditures
Kind of Business
Sole or partnership or joint stock company
kinds of partners
type of societies
Welfare purpose
honesty
staff
Chamber of Commerce
Channel of Distribution
Receipt of inquiry
Taxes
Place of business
Motivates
Slogan
average policy
policy makers
Problems of starting a business
selection of product
demand for the product
provision of capital
size of business unit
degree of risk
capital
Friday, February 19, 2010
The Concept of near Money
Strictly speaking money includes the currency notes and coins which are legal-lender 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. ft 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
Money Near Money
1, Interest Earning
Interest is earned on near money that is why when interest rates-are high there is a tendency to hold wealth in form of near moneys. The rate" of inflation however affects the real rate of interest. Due to increase in the rate of inflation real interest rate decreases. |
No interest is earned on it. Its value is affected by the rate of inflation. If the general price level increases the value of liquid money falls. On the other hand if Aere is an appreciation in the exchange market, the value of money increases.
2. Content
ft is denoted by Ml and includes currency, It includes M2 + M-3 (fix deposits, bearer
coins. certificates, bonds etc.)
coins. certificates, bonds etc.)
3.-Liquidity
B 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
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 rentier
Money (currency and coins) are legal, This is not a legal tender. The creditor can
lender. These can be used to discharge any refuse to take payment in the form of near
•amount of business obligations. money.
lender. 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
Thursday, February 18, 2010
Characteristics of Good Money
Characteristics of Good Money
General Acceptability:
The good money is one which is generally acceptable by all without any hesitation. It means that anyone will be willing to readily accept it in the settlement of debt or in discharge of any obligation.
2. Stability:
The value of money should stay stable otherwise people will loo.se confidence over it. It means mat the commodity chosen as money must not depreciate due to usage or wear and tear.
3. Standardized:
The good money is of standardized nature and quality of its material does not undergo any great change, it must not be weak in such a m'ahner mat may leose its . original form and shape due to any mishandling or change of temperature. •-
4. Economical:
The issuances of good money should always-be economical. ThiS' means that cost incurred on its issuance must be very low as compared to its valife. Taking a simple example we can say that issuance of one rupee note would be economical for Pakistan government if cost of printing a note is less than one rupee.
5. Storability:
A A good niondy is one iri the shape 6ft which purchasing power can be stored for a longer period. This means that people artist be able to save the money value considerable surety that it will not lose its value.
6. Divisibility:
A good money is capable of being divided into smaller denominations. Hence both the costly and cheap things' can be purchased from such money
7. Transportability:
A good money, is easily transferable fomi one place to another. Paper money is the best example .of this. Not only it can be transferred easily over long distances but we also have different modes of transferring it such as cheques, pay orders, drafts, TC'c etc,
8. ; Recognizable;.
Good money is one that can be-easily recognized by seeing or touching. It should be of such a nature that can be easily identified by anyone.. Moreover different denominations should be in different colour or size in order to avoid any confusion.
9. Difficult to Copy:
A good money is one. which.is very difficult to be,copied. In. other-words there should be no danger of fake issuance. There must be certain mark on it which can be easily identified by everyone and which can also be used to determine its originality
10. Easily Meltable:
A good eurrency can be conveniently kept and stamped. Malleability is mainly a quality of metal coins. The metal coins can be melted and reproduced with new. government seals. So sucft a material that cannot be .melted is not fit for making coins. Paper currency is also malleable in a sense that it can recycled to produce new notes
11. Elasticity:
The supply of money should remain elastic. It means that it should respond to the general needs of the economy. It must be of such a nature that its supply can be increased, or decreased to satisfy the requirements of the economy.
12. Element of Supervision:
A good money is. one that can be effectively supervised by a central monetary authority, It is, of such .a nature mat central authority is able to keep records of the amount of money in circulation and the pattern of its distribution
13. Scarcity:
A good money should be scarce in quantity. Its quantity in the economy should be kept low as compared to the desire for it. This implies that people witt always be working hard to*ara mow money in order to meet requirements of life.
Conclusion:
* ..
These are the characteristics of an ideal money. The paper currency conforms to majority &f .these standards. However the biggest drawback of our paper currency is that it is exposed to inflation due to which is losing its value over time.
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