Like the economic science it is based in principle on the fact that most goods are limited and must by the participants be managed. Thus it helps in stimulating all kinds of economic activity, which depends upon on borrowed money or credit. How much money is out there? It makes economic calculations easy. Thus when there is severe inflation or deflation, money ceases to serve as a standard for deferred payments. Money is one of the fundamental inventions of mankind. Keynes in his General Theory followed the traditional view and defined money as currency and demand deposits.
Today almost all the money is coming under this form. According to him, to hold money is to keep it as a reserve of liquid assets which can be converted into real goods. As long as money is generally acceptable, there will be no difficulty in the process of exchange. Now the value of various goods and services are expressed in terms of money such as Rs. When goods are exchanged for goods even then money is used as a measure of value. It also helps in achieving other objectives a firm like attaining industry leadership, market share expansion and social responsibilities etc. The empirical results will ultimately depend upon the nature of assets included in the definition of money as a temporary abode of purchasing power.
Most of the examples we have been talking about are not merely of academic interest, even though we cannot take time out to trace the far reaching consequences. This function of money also separates the transactions in time and place because the sellers and buyers of a commodity are not required to perform the transactions at the same time and place. Barter is a system of trading without the use of money. Money reduces the cost of this transaction because, while it might be very difficult to find a mechanic who would exchange car repairs for bassoon concerts, it is not hard to find one who would exchange car repairs for money. Money's most important function is as a medium of exchange to facilitate transactions.
Suppose the wealth of a man consists of a thousand cattle. In this way, individuals can specialize in one area and increase productivity with that item. It, therefore, affords the freedom of choice. Since, money has high liquidity people like to store value in terms of money. Let's run down our list of characteristics to see how they stack up. He has not actually produced anything himself. A 20-dollar bill can be exchanged for other denominations, say a 10, a 5, four 1s, and 4 quarters.
It may be noted that any asset other than money may also perform the function of store of value, for example, bonds, land, houses, etc. The use of money as a medium of exchange overcomes the drawbacks of barter. Thus, money not only helps current transactions though functions as a medium of exchange, but facilitates credit transaction i. Unlike fruit that grows on a tree, money cannot be grown or 'created' like other items. The person who owned a cow can now simply sell it to the person who offers the most money for it and then buy the bullock cart from another person who offers him the best bargain.
You will also learn how commodity money differs from representative money and how both differ from today's fiat money. The raw material is purchased to make new things. Producers sell their goods to the wholesalers in exchange of money. It enables a person to keep a portion of his assets liquid. Money is able to retain its value over time. Money helps in measuring national income. Although it is an efficient store of value, money is not a perfect store of value.
However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Representative money led to the use of fiat money-the type used in modern economies today. The Forms of Language types of sentences and the dangers of identifying form with function in the use of language. Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method. In other words, the value of money should not change often. Also most economics courses only cover the first three, since the fourth is merely a form of the first. Measure of Value: Another important function of money is that it serves as a common measure of value or a unit of account.
Medium of exchange: Money can be used for buying and selling goods and services. By acting as a standard of deferred payments, money helps in capital formation both by the government and business enterprises. Without a pricing process organised marketing and production is not possible. Thus, people are enabled to compare different prices and thus see the relative values of different goods and services. A Closer Look at Money There you are, shopping at your favorite store. This overly-simple statement refers to the liquidity of money. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.
Thus money gives us a good deal of economic independence and also perfects the market mechanism by increasing competition and widening the market. Money is the standard for measuring value just as the yard or metre is the standard for measuring length. In addition, it does not serve as a unit of account. Forward Planning:- The term 'planning' implies a consciously directed activity with certain predetermined goals and means to carry them out. In a money-based economy, I can sell my services as a bassoon player in an orchestra to those who are willing to pay for orchestra concerts with money. This is facilitated by the existence of money. Twenty-dollar bills are fairly durable and can be easily replaced if they become worn.
As a matter of fact, measuring the values of goods and services in the monetary unit facilitates the problem of measuring the exchange values of goods in the market. Arnold says real criticism obeys instinct without instruction and should remain disinterested in order to properly portray knowledge. It can be held over a period of time and used to finance future payments. This introduces considerable hazard in using money or assets as a store of value. And for performing the other two functions—that is, to be used as a store of value and standard of deferred payment—money should have stability of value.