Chapter 2: Money PDF

CHAPTER - 2 : MONEY Introduction : Barter system : It refers to exchange of goods Man is an intellectual animal. The for goods. invention of money is one of the important Difficulties in Barte...

CHAPTER - 2 : MONEY Introduction : Barter system : It refers to exchange of goods Man is an intellectual animal. The for goods. invention of money is one of the important Difficulties in Barter System : and fundamental inventions out of various 1) Problem of double coincidence of wants : inventions in the world. According to Crowther, Lack of double co-incidence of wants there is a basic invention in each branch of was one of the major limitations of barter knowledge, e.g. invention of fire in science, system. For instance, person ‘A’ has cloth invention of wheels in mechanical science. and he wants rice in exchange and person The concept of money is an important concept ‘B’ has rice but he does not want cloth in which has brought about a revolutionary change exchange. In this case exchange between in the economic life of human beings. Various ‘A’ and ‘B’ would not take place as their goods and services are bought and sold with the wants do not coincide with each other. help of money, to satisfy human wants. Modern 2) Lack of common measure of value : While economy is dependent on money. Money which exchanging goods for goods, there was no is in circulation today was created to reduce the standard unit of account to determine the difficulties in Barter System. value of a commodity. e.g., it was difficult to compare two litres of milk with two kilograms of rice. 3) Difficulties in storage of goods : It is necessary to store goods for future consumption. Sometimes due to perishable nature of certain goods it was difficult to store them for future. Perishable commodities like milk, eggs, fish, vegetable etc. were difficult to store. Difficulties were also experienced due to lack of space required to store heavy and bulky goods. 4) Indivisibility of certain goods : In barter system it was inconvenient to divide Fig. 2.1 : Barter system animals, house etc. into small parts, so it was difficult to fix proportion of one commodity Problem of double in exchange for another commodity, e.g. coincidence of wants Individual 'A' has a sack of wheat and he Lack of common wants a goat in exchange. Individual 'B' has a measure of value goat and he wants only half a sack of wheat. Difficulties in In this situation exchange between the two Difficulties in Barter System commodities is impossible due to indivisible storage of goods nature of goat, for it being a live stock. Indivisibility of 5) Problem of making deferred payments : certain goods Deferred payment means payments to be Problem of making made in future. Repayment of loan was deferred payments difficult due to exchange of commodities, 9  e.g. it was difficult to repay the perishable goods in the same condition in future. Definitions of Money : 1) Prof Crowther : "Money is anything that is generally acceptable as a means of exchange and at the same time acts as a measure and a store of value". Till Date 2) Prof Walker : "Money is what money does". Evolution of money : Money has come into existence by evolution and not by revolution. With passage 8) Electronic Money of time, the commodities which 7) Plastic Money were used as money have changed depending upon the need of time 6) Credit Money and development of civilization. 5) Paper Money Money used in modern times is 4) Metallic coins a result of many evolutionary changes that took place over a 3) Metallic Money long period of time. 2) Commodity Money Following are the types of money which very well explain the 1) Animal Money evolution of money (Fig. 2.2). Types of Money : 1) Animal money : In protohistoric period, ‘animal money’ was used as a means of exchange, e.g. cow, sheep, goat etc. However, due to their indivisible nature, commodity money came into existence. 2) Commodity money : In olden days, the commodities to be used as money were dependent upon climatic conditions and culture, e.g. animal skin, grains, shells, feathers, tusk, salt, rare articles and stones were used as a medium of exchange. Due to the problem of storage of such commodities, metallic money came into existence. 3) Metallic money : Metallic money used durable metals such as gold, silver, copper, aluminum, nickel etc. However, scarcity of precious metals and lack of uniformity in metallic pieces gave rise to the use of metallic coins. 4) Metallic coins : In ancient times, rulers of various kingdoms used small pieces of metals and affixed their seals on them. With the passage of time, the monetary system was taken over by the government authorities with a view to give uniformity and legal status to metallic coins. Coins can be classified as under : a) Standard or full bodied coins : Full bodied coins are those whose face value is equal to their intrinsic value. Face value indicates the protohistoric exchange value fixed by issuing authority. These coins are made out of period precious metals like gold, silver etc. Standard coins were used for some days during the British period. Fig. 2.2 : Evolution b) Token coins : Token coins are those whose face value is higher of Money 10  than their intrinsic value. These coins are smart cards, computer etc. It is backed by made of cheaper metals like aluminum, the Central Bank. Electronic money is used nickel etc. These coins are of lower for purchases and transactions globally. denominations and are generally used for Digital wallets are also a form of stored settling smaller transactions. In India, all electronic money. coins in circulation today are token coins. Difficulties in transportation of token coins Find out : gave rise to paper money. List of various modes of digital transactions. 5) Paper Money : Paper Money was a substitute for metallic money. In course of time, issue of currency notes was monopolized by the You should know : Central Bank. Paper money consists of a) Legal Tender Money : It is the money paper currency issued by Government and which is backed by law and cannot be Central Bank of the country. refused in transaction by anybody on any In India, one rupee note and all coins are ground. In India, all coins and currency issued by the Government of India. Currency notes are legal tender money. notes of higher denominations are issued by b) Non-Legal tender Money : It is the money the Central Bank (Reserve Bank of India). Inconvenience in handling and risk of storing which is generally used by people in final paper money gave rise to bank money. payments but there is no legal compulsion of acceptance. It can be refused. Cheques, bills 6) Bank Money or Credit Money : Bank of exchange are examples of this money. It money refers to deposits which are in the is also known as optional money. form of cash saved by the people. It is used to create credit money. This can be withdrawable and transferable on demand, Qualities of Money : by means of cheque, demand draft etc. The qualities of money are as follows : Cheque, demand draft are not actual money 1) General Acceptability : Anything which is but credit instruments through which deposits used as money must be easily accepted by are transferable. Credit money plays an all for exchange purpose. important role in economic development. On the background of global economy, cashless 2) Divisibility : Money should be easily transaction gained importance thereby divisible into smaller denominations to giving rise to plastic money. facilitate small transactions. 7) Plastic Money : Plastic Money is easy 3) Durability : Money should also possess the to use in transaction due to advanced characteristic of durability. Currency notes technology. Debit cards and credit cards are and coins are being used repeatedly and used as plastic money. Further innovation shall continue to do so for years together on in smart transactions led to the introduction account of durability. of electronic money. 4) Cognizability : Money must be easily recognised. It should have certain distinct Find out : Recent changes introduced by marks so as to avoid confusion by the banks for safe use of plastic money. receiving person. 8) Electronic Money : E-money or Electronic 5) Portability : It should be easy to carry from money is a monetary value that is stored one place to another without any difficulty, and transferred electronically through a expense and inconvenience, e.g. currency variety of means i.e. a mobile phone, tablet, notes are easily portable. 11  6) Homogeneity : Money of a particular building, plot, shop, agricultural land etc. can denomination must be homogeneous or be sold at one place and can be purchased at identical in its features. another place with the help of money. 7) Stability : Money should have a stable C) Contingent Functions : monetary value. It serves as a measure According to Prof. Kinley, in the modern of value to exchange goods and services. period money plays an important role almost in These goods can be sold and purchased in all economic transactions. future as per requirements. 1) Measurement of National Income : Functions of Money National Income is expressed in money A) Primary Functions : terms. Distribution of national income 1) Medium of Exchange : The most important among the four factors of production is function of money is to serve as a medium in terms of monetary rewards. e.g. rent, of exchange. Any commodity can be wages, interest, profits etc. purchased or sold for money. 2) Basis of Credit : Commercial Banks 2) Measure of Value or Unit of account : Price create credit money on the basis of primary is the value of a commodity or a service deposits. Money provides a liquid base for expressed in terms of money. Money enables creation of credit money. to compare the prices of commodities. 3) Imparts liquidity to wealth : Money is Different currencies are used to express the called the most liquid asset. Money can value of commodity in different countries, e.g. Rupee in India. Dollar in U.S.A., be easily converted into any asset and any Pound in U.K., Yen in Japan etc. Income asset can be converted into money. e.g. a and expenditures of all kinds, assets and person can purchase gold and if he wants liabilities are stated in terms of money as a he can sell it and purchase government unit of account. bonds, securities etc. B) Secondary Functions : 4) Estimation of macro economic variables : Macro Economic variables like Gross 1) Standard of deferred payments : Under National Product (GNP), total savings, barter system taking loans was easy, but total investment etc. can be easily estimated its repayment was difficult because loan was in the form of grains, cattle etc. Money in monetary terms. It also facilitates has overcome this difficulty. Payments to government tax collection, preparation of be made at a future date is called deferred budget etc. payments. By serving as a standard measure Concept of Black Money : of payment over a time, money makes Black Money is any money which is received borrowing and lending easy. in cash but not accounted for and on which tax 2) Store of value : Money acts as a store is not paid to the government. Black Money is of value. Money not only satisfies wants tax evaded income. It can be earned through in the present but also makes provision both legal and illegal means. Black money for satisfaction of wants in future. This is encourages illegal activities such as corruption, possible due to savings. According to Lord bribery, black marketing, hoarding etc. This J. M. Keynes, 'money is a link between the creates obstacles in economic development. present and future'. Economic, political and social instability are 3) Transfer of Value : Money enables transfer created in the economy due to black money. To of value from one person to another and control black money, demonetization is one of from one place to another. Real assets like the tools, which many countries have adopted. 12  EXERCISE Q. 1. Complete the correlation : Q. 4. Identify and explain the concepts from the given 1) Primary function of money : Medium of exchange illustrations : :: : Transfer of value 1) Vasantsheth provides coal from his shop to farmers 2) : Basis of credit : Secondary functions of in exchange for foodgrains. money : standard of deferred payments. 2) Babanrao deposits his money in a nationalized bank. 3) Commodity money : Shells : : : Credit card 3) Charu used her debit card to purchase a shirt for her younger brother. 4) Divisibility : Smaller denomination; :: 4) Malathi purchased a house through an agent. The Easy to carry from one place to another. agent accepted the commission amount in cash but 5) Barter system : Goods : : Modern economy did not issue a receipt to her. Q. 2. Give economic terms : 5) To prevent misuse/fraudulent use of the national currency, a note ban is imposed on its use at certain 1) The act of exchanging goods for goods -............... times....................... 2) Provision for making payments in future -............. Q. 5. State with reasons whether you agree or........................ disagree with the following statements : 3) System that makes use of currency for facilitating 1) There are no difficulties in barter system. payments -................................. 2) There are many good qualities found in modern 4) Credit instrument through which bank deposits are currency. transferable -.............................. 3) Many tasks are accomplished by money. 5) Monetary value stored and transferred 4) Money can be sent anywhere through electronic electronically by means of computer hard drive or means. servers -........................................... 6) Money not accounted for in the bank and not Q. 6. Answer the following questions on the basis of the disclosed to the government -....................... following information : Ganesh travelled to the mall by bus. He gave the Q. 3. Choose the correct option : conductor ` 10 coin for the ticket. He purchased many 1) Arrange in the order of evolution of money. commodities from the mall. a) Metallic money At the billing counter, he gave his credit card for b) Animal money payment but the billing clerk informed him that only c) Metallic coins debit cards were accepted. Since Ganesh had forgotten his d) Commodity money debit card at home, he offered to make payment by cash. Option : 1) a, b, c, d 2) b, d, a, c 1) Identify the types of money used in the information 3) d, c, a, b 4) c, a, b, d 2) Explain any two of them. 2) Arrange in the order of evolution of money. ””” a) Plastic money b) Paper money c) Electronic money d) Credit money Option : 1) b, d, a, c 2) a, b, c, d 3) d, c, b, a 4) c, b, a, d 13