Economics Ch.5 Class 12th (MONEY)

 Ch.5 (MONEY)

Money - A thing which is commonly accepted as a medium of exchange is called money.

For Ex.A rupee in India is money , as it is commonly accepted medium of exchange here. Likewise , a a dollar in U.S.A is money , as it is commonly accepted medium of exchange there.

Evaluation of Money :-

1.Money is the medium of exchange.

2.Money is the medium of storage.

3.Money is the medium of transfer of value.

4.Money is the medium of future payment.

Evolution of Money :-

Phase 1 :- In old days , goods were exchanged for goods . There was no money This system of exchange was known as Barter System . But due to multiplicity of wants barter system proved to be an inefficient system of exchange.

Phase 2 :- Due to the failure of barter system , the money was invented . Now goods were sold for money - a common medium of exchange . Initially coins of gold and silver were introduced as money. It also failed.

Phase 3 :- Now is the age of plastic money (in the form of debit or credit cards) and e-money in the form of electronic transfer of money.

These the origin and evolution of money is related to the need to facilitate exchange.

Barter System of Exchange :-

Barter System :- Barter System of exchange is a system in which goods are exchanged for goods in the term of good.

Barter System is also known as C-C economy.

Here C = Commodity

It means commodity for commodity exchange economy.

Drawbacks Of Barter System :- (And their Elimination)

1.Double Coincidence of Wants :- 

Double Coincidence of wants is a core characteristic of the barter system of exchange . Double coincidence of wants implies that at a point of time , the two individuals must possess each other's required goods . Bit it is not always so simple (With the emergence of money , the problem of double coincidence of wants has vanished . Money as a medium of exchange has separated the act of sale & purchase.

2.Lack of a common unit of value :- 

In barter system there was no provision for the measure of value . There was no common unit of the measurement of value . (Evolution of money has given us a common unit of value).,

3.Difficulty of Future Payments or Contractual or Deferred Payments :- 

In barter system , it was very difficult to make future payment when we barrow from somebody , we have to return both the principal well as interest amount , sometime is future it is difficult to make such payments in term of goods and services. (Money is convenient mode of these payments . Evolution of money also has facilitated contractual payments).

4.Difficulty of storage of value and transfer of value :-

In barter system , saving is possible only by way of storage of goods . It involves was not convenient to store value in C-C economy . Because goods tend to wear out or perish . It was also a difficult task and expensive task to transfer saving from one place to the another. (Evolution of money has made storage and transfer of value much easier).      

Forms of Money :-

1.Fiat Money / Money value of Money / Credit Money :-

 It refers to that money which is issued by order or authority of govt.

It is also called credit money because its money value is more than its commodity value.

For Ex.All the notes and coins.

2.Fiduciary Money :-

 It is that money which is accepted as a medium of exchange because of trust b/w the payer and the payee.

For Ex. Cheques.

3.Full Bodied Money :- 

It refers to money in terms of coin whose commodity value is equal to money value as and when these are issued.

    CV = MV

For Ex.A rupee coin in India during British Period in India was male of silver . Market value of silver contained in the coin was equal Rs.10.                                             

Supply of Money :-

Money Supply :- It refers to the stock of money which is held by the people of a country at a point of time.

It does not include stock of money held by the suppliers of money :-

1.The govt. of country

2.The Banking System of Country.

-the central bank

-the commercial bank

Measures of Money Supply :-

M1 Measure of Money Supply

M1 = C + DD + OD

C - It refers to currency held by people.

DD - It refers to demand deposits of the people with RBI.

OD - It includes :-

1.DD of public financial institutions with RBI like N.A.B.A.R.D.

2.DD of foreign central banks and foreign governments with RBI.

3.DD of international financial institutions like IMF and World Bank.

OD does not include :-

1.Deposits of govt. of country with RBI.

2.Deposits of country's banking system with RBI.

M2 Measure of Money Supply

M2 = M1 + deposits with post office saving bank A/c

M3 Measure of Money Supply 

M3 = M1 = Not term deposits with commercial banks.

M4 Measure of Money Supply

M4 = M3 + Total deposits with post office.

>Difference b/w Bank Money & High Powered Money.

Bank Money

1.Meaning - It refers to demand deposits of the people with the Commercial Bank.

2.Base Money - It is not a base money.

3.Chequables - It is chequeable.

High Powered Money

1.Meaning - It is sum total of a)currency held by people b)vault cash of commercial bank c)cash reserves of commercial banks with RBI.

2.Base Money - It is a base money in economy.

3.Chequeable - It is non - chequeable.