Barter exchange is direct exchange of commodity for commodity. It is also called C-C.economy (i.e., commodity for commodity). The trading costs of barter exchange depends upon the size of the group- larger the size of the group, more will be trading cost. Trading costs are cost of engaging in trade, It has two components:
(a) Search Cost:- It is the cost of searching the person who will buy your good and give you the good which you want.
(b) Disutility of Waiting:- It is the time and effort required in the search searching the required person. more will be search cost and disutility of waiting. A solution to this problem is to find commonly accepted good as a medium of exchange. In the past, goods like livestock, seashells, pearls, etc. have been used period. Longer the time period spent ona as a common medium of exchange.
Problems of Barter Exchange:-
1. Lack of Double Coincidence of Wants:-It is difficult to come across of some goods and services to find someone else who wants both his goods and services more than anything else and possess those goods
2. Lack of Divisibility:- In commodity exchange, difficulty of dividing the commodity arises. For example, if car is to be exchanged for a scooter, The major problems of barter exchange are: Owner double coincidence of want. It means that it is very difficult for and services that our trader wants more than anything els then car cannot be divided. Similarly, animals cannot be divided sımaller units.
3. Difficulty in Storing Wealth (or generalised purchasing power):- It is difficult to store potatoes, tomatoes, grains, etc. So, in case of there commodities, it is difficult for people to store their purchasing power.
4. Absence of Common Measure of Value:-When thousands of goode are produced and exchanged, there should be unlimited exchange ratios. In fact, cach good must have many different values depending upon the commodity in exchange. For example, 1 pair of socks can be exchanged for I kg. of wheat, but 10 pair of socks might be the right exchange value for 1 pair of shoes. It limits the amount of trade, No accounting system is possible because of absence of a common unit to measure the value of goods and services.
5. Lack of Standard of Deferred Payment:-
With commodity exchange, it is not possible to have a satisfactory unit of future payments like salaries, interest, loan, etc.
3.2 EVOLUTION OF MONEY
Money is the most useful and necessary invention. Money is anything thát can serve as a medium of exchange. Historically, it has undergone a long process of evolution:-
1. Commodity Money:- Human beings exchanged goods for goods called barter exchange. All sorts of commodities like seashells, tobacco, coOM Teather, pearls, precious stones, salt, etc. have been used as a medium of exchange. They were called commodity money.
2. Metallic Money:- Up to first half of the 18th century, the medium of exchange were metals, particularly gold and silver. Gold and silver found prominence for the folowing reasons:
(a) Gold and silver were widlely accepted in monetary transactions like buying and selling, borrowing and lending, for storing wealth, etc. When people use gold for money, the cconomy is said to be on gold standard.
(b) They were in limited supply.
(c)They were durable (nearly non-perishable).
(d) Gold and silver could easily be divided into monetary units.
But after 1930s use of metallic money as a medium of exchange was discarded because:
(a) The world's production of gold and silver was not enough to match the requirements of increasing volume of internal and external trade.
(b) Even if supply was sufficient, inconvenience in handling large transactions, lack of safety during transportation of metals, etc. came in the way of using gold and silver as a prominent medium.
(3) Paper Money:- From 1930s onward, most countries are using paper currency as a prominent and nearly exclusive, medium of exchange. Itis because of phenomenal rise in the volume of transactions needing more and more money.
(4) Bank or Credit Money:- Together with paper money, people have started using credit money like cheques, drafts, etc. Plastic money in the form of debit and credit cards is also an attractive and easy medium of exchange. Bank money has the advantage that it reduces risk, is convenient form of money and is durable.
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3.3 MONEY-MEANING
Various types of definition of money are:
1. Legal Definition of Money:- According to law, "money is what the law says it is." Money has legal tender power. That is, it can be used to discharge debts. According to Robertson-"Money is anything which is widely accepted in payment for goods, or in discharge of other kinds of business obligations." Legally, money can be of two kinds:
(a) Legal Tender Money:- It means money under the law of land. The government issues an order stating what is money and that becomes legal tender money. Currency (coins and notes) is legal tender money. It is also called fiat money because it serves as money on the order of the government.
(b) Non-legal Tender Money:- It is optional and voluntary money which is generally accepted as money on the basis of trust that their issuer commands. For example, drafts, cheques, bills of exchange, etc. It is also called fiduciary money because it K accepted as money on trust.
2. Functional Definition of Money:- A functional definition of money includes all things that perform the four functions that money does medium of exchange, measure of value, standard of deferred paymerits and a store of value. Money includes coins, notes and chequeable deposits.
3. Narrow vs. Broad Definition of Money:- Narrow definition of me is based upon its medium of payment function. According to Crowithe "Money is anything that is generally acceptable as a means of exchan and at the same time acts as a measure and as a store of value" includes currencies and demand deposits of banks. In broad definition of money, scope of money is extended to include store of value function, in addition to medium of exchange function These have high degree of moneyness and are widely used as store of value. In addition to currency and demand deposits (i.e., narrow money), items like time and savings deposits at banks and post offices are also included in broad money.
3.4 FUNCTIONS OF MONEY
Money has made economic life systematic and organised by performing various functions. The following couplet brings out the major functions of money:
"Money is a matter of function four: A medium, a measure, a standard, a store."
As this couplet reveals, money performs four major functions, which are
(a) Money is a medium of exchange.
(b) Money is a measure of value.
(c) Money is a standard of deferred payments.
(d) Money is a store of value,
Kinley classified the functions of money into three groups:
(i) Primary functions
(ii) Secondary functions, and
(iii) Contingent functions.
1. Primary Functions
Money must perform primary functions in an economic system irrespective of time and place. Primarily functions of money are :
(a) Medium of Exchange:- This is the central function of money. For performing this function, money should have general acceptability. Money as a medium of exchange divides the exchange transactions into two parts namely, sale and purchase. This function of money removes the difficulty of double coincidence of wants. Money facilitates sale and purchase independent of each other.
(b) Measure of Value:- Money serves as a unit of account. As 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. Money works as a common denominator into which the values of all goods and services are expressed. When we express the value of a commodity in terms of money, it is called price and by knowing prices of various commodities, it is easy to calculate exchange ratios between them, .
2. Secondary Functions.
Secondary functions of money are derivatives of the primary functions. There are three secondary functions performed by money. These are:
(a) Store of Value:- Wealth can be conveniently stored in the form of money. Money can be stored without loss in value. Savings are secured and can be used whenever there is a need. In this way, money acts as a bridge between the present and the future.
(b) 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 payment on some future date. In those situations moncy acts as a standard of deferred payments. It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous services. Thus, money serves as a store of value.
(c) Transfer of Value:- With money, purchasing power can be transferred from one person to another and from one place to another, up to any amount, due to its general acceptability. Money can affect suh transfers easily, quickly and efficiently.
3. Contingent Functions
Money also performs certain contingent functions. These are as follows:
(a) Basis of Credit:- The modern economy is based on credit. Use of cheques, hundies, bills of exchange, promissory notes is widespread. All these credit instruments are claims over money, their possession provides an easy way of transferring value.
(b) Basis of Distribution of Income:-Money has facilitated the task of factor payments or distribution of national income. Money remunerations are paid in the form of wage, rent, interest and profit.
(c) Equalisation of Marginal Utilities and Productivities:- A consumer can maximise his satisfaction by equalising marginal utilities from various goods. It is possible since prices of all goods are in terms of money. Similarly, a producer can maximise his production by equalising marginal productivities of factors of production. It is possible since prices of factors and goods are in terms of money.
(d) Guarantor of Solvency:-As Kent put it, "Money guarantees liquidity te all types of wealth." When a firm fails to honour its commitments ae obligations, people start suspecting its credibility. They fear solve of the firm. Thus, it is essential that a firm should have sufficien liquidity in its asset structure to serve as a guarantor of its solvency.
(e) Best Utilisation of Resources :-Money acts as a carrier of decisions An individual who keeps his money frozen in land, building other fixed assets will waste the opportunity for best utilisation of resources. Therefore, it is important to keep the purchasing power in monetary shape to be able to take advantage of an investment or some opportunity.
(f) Liquidity:- Money is the most liquid asset. It can be converted into type of asset according to choice of the holder. The mobility and productivity of capital rises with liquidity of money.
3.5 COMMODITY MONEY AND FIAT MONEY
Full bodicd money is made of certain metal (gold and silver) and its face lue is equal to its intrinsic value. It is also referred to as commodity money. Commodity money is both a medium of exchange and a store of value. Tlat money or token money are iems designated as moncy that are intrinsically worthless. .
3.6 SUPPLY OF MONEY
estock of money held by the public at a point of time in an economy is ferred to as the money supPply (Public means private individuals and ness firms. It excludes government, Central Bank and commercial banks.) he money supply of an economy at any point of time is the total amount of money in circulation.
Items Excluded from Money Supply.
Items not included in money supply of a country are:
(a) The amount of coins and currency held by the commercial banks as their cash reserves.
(b) The stock of gold held with the Central Bank.
(c) Cash held by the government in treasury and the Central Bank.
3.6.1 Components of Money Supply
There are two main components of money supply, i.e., currency (or fiat money) component and deposit component.
1. Currency Component:- It consists of coins and paper currency.
(a) Coins:- Coins are made up of metal. The metallic coins are issued by the monetary authority of the country, i.e., Central Bank. The metal used in coins has no significance and these coins are used as token coins since their face value is much higher than their intrinsic value. In India, today coins of 1, 2, 75 and 3 10 are in use.
(b) Paper Currency:- Paper currency or currency notes are the most important part of the money supply. The Central Bank in every country has monopoly right of issuing currency notes. In India, one rupee note is issued by the Ministry of Finance, Government of India, while the remaining notes of higher denominations or coins are issued by the Central Bank, i.e., Reserve Bank of India. The Central Bank is permitted to issue notes to any extent provided a minimum reserve is kept in the form of gold and foreign securities. In our country, RBI has to keep reserve of 200 crores in which there is gold bullion of 115 crores and foreign securities.
2. Deposit Component or Demand Deposits:- Demand deposite the most important component of the money supply. These are money deposits made by the depositor to the bank. Bank agreee honour demands or pay money on demand at any time and o whomsoever the owner of the deposit may wish. For this purn people use cheques to meet financial obligations.
3.6.2 Measures of Money Supply
From April 1977, following the recommendations of its Second Workine Group on Money Supply, the Reserve Bank of India (RBI) has presented four measures of money supply namely M1, M2, M3 and M4,These are defined below in decreasing order of their liquidity.
1, Narrow Measures of Money Supply
M1 measurement.:- It is narrow definition of money. M1 is most liquid and easiest for transactions. It is measured on a specific day (that is, at a point of time).
M1 = C+ DD + OD
where
C = Currency held by public.
DD = Net demand deposits of the bank (Net demand deposits do not include inter-banking claims)
OD = Other deposits held with the RBI. These are deposits of quasi- government institutions like Industrial Development Bank of India, International Monetary Fund, World Bank, etc, with the RBI.
M2 measurement:- It is also narrow money. Besides all the components of M1 it also includes savings of the people with the post offices.
M2 = M1 + Savings of People with Post Offices.
2. Broad Measures of Money Supply
M3 Measurement:- M3 is broad money. It is most commonly used measure of money supply. Besides all the components of M1 it includes, (net) time deposits (or fixed deposits/or term deposits) of people with the commercial banks.
That is,
M3 = M1 + Net time deposits with the Commercial Banks
If money supply in the country is measured using M3 measure, what we find is called 'aggregate monetary resources' (AMR) of the country.
M4 Measurement:- M4 concept of money supply is still broader, it is broader than M Besides all the components of M3 it also includes savings with the post offices (other than in the form of National Saving Certificates).
Thus,
M4 = M3 + Savings with the Post Offices (other than in the form of National Saving Certificate)
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