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MONEY

Alex. K. GeorgeBSF-10-002

MONEY

Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another.

-medium of exchange

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EVOLUTION OF MONEY Commodity money: Gold, Silver, other precious metals, certain

stones, Cigarettes, etc.

Representative money that is backed 100 % by precious metals.

Fiat money: No consumption or investment use: intrinsically useless pieces of paper.

Checks

e- money & plastic money

CHARACTERISTICS OF MONEY

i. Durabilityii. Divisibilityiii. Transportabilityiv. Non counterfeit abilityv. Limited supplyvi. Acceptability

1. DURABILITY

• Item retains the same shape, form, and substance over an extended period of time

• It does not easily decompose, deteriorate, degrade, or otherwise change form.

• Durability also extends beyond the physical realm to include social and institutional durability.

2. DIVISIBILITY

• Means money can be divided into small increments that can be used in exchange for goods of varying values.

• For an item to function as the medium of exchange, which can be used to purchase a wide range of different goods with a wide range of different values, then it must be divisible. The smaller the divisions, the better.

3. TRANSPORTABILITY

• Means that money can be easily moved from one location to another when such movement is needed to complete exchanges.

• The money must be transportable. Money that is NOT transportable is not transported, so it is not used.

4. NON COUNTERFEIT ABILITY

• Means that money cannot be easily duplicated.

• A given item cannot function as a medium of exchange if everyone is able to "print up," or "make up" a batch of money any time that they want.

5. LIMITED SUPPLY

• Means that restriction on the amount of money in circulation

• Respective country’s Government has the responsibility to control/maintain an adequate money supply to the market based on their monetary policies.

6. ACCEPTABILITY

• Acceptability means that everyone must be able to use the money for transactions.

• Money is universally accepted anywhere in the world as a universal mean for transaction.

TYPES OF MONEY

1. Commodity money2. Fiat money3. Bank money

1. COMMODITY MONEY

• Commodity money is a good whose value serves as the value of money

• Gold coins are an example of commodity money.

• Commodity money has been replaced with fiat money. 

2. FIAT MONEY

• Fiat money is a good, the value of which is less than the value it represents as money.

• Currency are an example of fiat money because their value as slips of printed paper is less than their value as money.

3. BANK MONEY• Bank money consists of the book credit that

banks extend to their depositors. • Transactions made using checks drawn on

deposits held at banks involve the use of bank money.

• example:- DD, Checks, credit & debit cards

PLASTIC MONEY• Plastic money is a term that is used in

reference to the hard plastic cards we use everyday in place of actual bank notes.

• Different forms such as cash cards, credit cards, debit cards, pre-paid cash cards, store cards, etc.

FUNCTIONS OF MONEY

FUNCTIONS OF MONEY

i. Money as a unit of valueii. Medium of exchangeiii. Standard of deferred paymentsiv. Store of value

1. MONEY AS A UNIT OF VALUE

• Money measures the value of various goods and services which are produced in an economy.

• Money works as unit of value or standard of value.

• Money works as common measure of value by expressing exchange value of all goods and services in money in the exchange market.

2. MEDIUM OF EXCHANGE

• Money facilitates transactions of goods and service as a medium of exchange.

• Eg; Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the same goods to the consumers in exchange of money.

3. STANDARD OF DEFERRED PAYMENTS

• Modem economic setup is based on credit and credit is paid in the form of money only.

• Money, besides being the basis of current transactions, is also the basis of deferred payments.

• Only money is such a commodity in whose form accounts of deferred payments can be maintained in such a way so that both creditors and debtors do not stand to lose.

4. STORE OF VALUE:• It was virtually impossible to store surplus value

under barter economy; the discovery of money has removed this difficulty.

• With the help of money, people can store surplus pur chasing power and use it whenever they want.

• Saving in money is not only secure but its possibility of being destroyed is very less. Besides, it can be used whenever needed.

• Money has become the only basis of promoting capital formation.

THE DEMAND FOR MONEY• The demand for money is affected by several

factors, – The level of income– Interest rates– Inflation– Uncertainty about the future.

• The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money:I. The transactionsII. The precautionaryIII. The speculative motives

1. TRANSACTIONS MOTIVE

• The transactions motive for demanding money arises from the fact that most transactions involve an exchange of money. Because it is necessary to have money available for transactions, money will be demanded.

• The total number of transactions made in an economy tends to increase over time as income rises. Hence, as income or GDP rises, the transactions demand for money also rises.

2. PRECAUTIONARY MOTIVE.

• People often demand money as a precaution against an uncertain future.

• Unexpected expenses, such as medical or car repair bills, often require immediate payment. The need to have money available in such situations is referred to as the precautionary motive for demanding money.

3. SPECULATIVE MOTIVE.• Money, like other stores of value, is an asset. The demand

for an asset depends on both its rate of return and its opportunity cost.

• Typically, money holdings provide no rate of return and often depreciate in value due to inflation. The opportunity cost of holding money is the interest rate that can be earned by lending or investing one's money holdings.

• The speculative motive for demanding money arises in situations where holding money is perceived to be less risky than the alternative of lending the money or investing it in some other asset.

SUPPLY OF MONEY

• The money supply of a country consists of currency (banknotes and coins) and bank money (the balance held in checking accounts and savings accounts).

• Bank money, which consists only of records (mostly computerized in modern banking), forms by far the largest part of the money supply in developed nations

M1, M2, M3

• M1, M2, M3 are all measures of money supply, the amount of money in circulation at a given time.

M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash.

M2 is somewhat broader measure of the supply of money, which includes all of M1 plus savings and time deposits held at banks.

M3 is an even broader measure of the money supply, which includes all of M2 plus large denomination, long-term time

• M1 being the narrowest measure and M3 being the broadest.

• Narrow money refers to forms of money that are available immediately for use in transactions,

• Broad those that are not immediately available.

REFERENCE• http://www.cliffsnotes.com/study_guide/Definition-of-

Money.topicArticleId-9789,articleId-9744.html• http://economics.about.com/od/money/a/Types-Of-Money.htm• http://www.shmoop.com/money-banking/types-of-money.html• http://www.amosweb.com/cgi-bin/awb_nav.pl?

s=wpd&c=dsp&k=money+characteristics• http://subramoneyplanning.blogspot.in/2011/11/money-its-

functions-characteristics.html• http://lexicon.ft.com/Term?term=m0,-m1,-m2,-m3,-m4• http://mrunal.org/2012/05/money-supply-m1m2.html

Thank you…

• en.wikipedia.org/wiki/Inflation• www.investopedia.com/terms/i/inflation.asp• www.inflation.co.in/• www.tradingeconomics.com/india/inflation-cpi

• www.westegg.com/inflation/