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unit 1 money.pptx

  1. BY Dr.Neerja Sharma
  2.  UNIT 1 :  Concepts & functions of Money,  origin and development of money,  limitations of barter system,  classification of money,  importance of money,  qualities of good money,  defects of money
  3.  Money is a liquid asset used to facilitate transactions of value. It is used as a medium of exchange between individuals and entities. It's also a store of value and a unit of account that can measure the value of other goods.  Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio- economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.
  4.  4 symbolic terms are used by RBI :  M1, M2, M3 and M4  M1 = Narrow money = cash + Demand deposits + Other deposits with RBI ( C+DD+OD)  M2= Extension to M1 = M1+ POSBD (Post office savings bank deposits ) relatively less liquid than M1M3= Broad money  M3= M1 + TD ( Time deposits)  M4= extension to M3 = M3+ TPO ( Total post office deposits)
  5.  (i) Money as a Medium of Exchange:  removes the need for double coincidence of wants and the inconveniences and difficulties associated with barter.  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.  Provides the freedom of choice. With money, we can buy an assorted bundle of goods and services. At the same time, we can purchase the best and also bargain in the market.  Thus money gives us a good deal of economic independence and also perfects the market mechanism by increasing competition and widening the market.  money acts as an intermediary. It facilitates exchange.  According to Prof. Walters, money, therefore, serves as a ‘factor of production,’ enabling output to increase and diversify.  money facilitates trade. When acting as the intermediary, it helps one good or service to be traded indirectly for others.
  6.  (ii) Money as Unit of Value  Monetary unit expresses the value of each good or service in terms of price. Money is the common denominator which determines the rate of exchange between goods and services which are priced in terms of the monetary unit.  The use of money as a standard of value eliminates the necessity of quoting the price of apples in terms of oranges, the price of oranges in terms of nuts and so on.  Solves the problem of measuring the exchange values of goods in the market. When values are expressed in terms of money, the number of prices are reduced from n(n-l) in barter economy to (n-1) in monetary economy.Money as a unit of value also facilitates accounting. “Assets, income and expenses of all kinds can be stated in terms of common monetary units  It helps in all types of economic and financial calculations  As pointed out by Culbertson, “Prices quoted in terms of money become the focus of people’s behaviour. Their calculations, plans, expectations, and contracts focus on money prices.”
  7.  (i) Standard of Deferred Payments:  Money as a standard of deferred payments means that money acts as a ‘standard’ for payments, which are to be made in future.  Every day, millions of transactions take place in which payments are not made immediately. Money encourages such transactions and helps in capital formation and economic development of the economy.  This function of money is significant because: 1. Money as a standard of deferred payments has simplified the borrowing and lending operations. 2. It has led to the creation of financial institutions.
  8.  (ii) Store of Value (Asset Function of Money):  Money can be used to transfer purchasing power from present to future. Money is a way to store wealth in most economical and convenient way.  It provides security to individuals to meet contingencies, unpredictable emergencies and to pay future debts. Under barter system, it was difficult to use goods as a store of wealth due to perishable nature of some goods and high cost of storage.  Money as store of value has the following advantages:  1. Money is available in fractional denomination = shinplasters  (united states federal govt. /civil war)  2. Money is easily portable. So, it is easy and economical to store money as its storage does not require much space.  3. Money has the merit of general acceptability so; it can be easily exchanged for goods at all times.  4. Savings in terms of money are much more secured than in terms of goods.
  9.  (iii)Transfer of Value:  Money also functions as a means of transferring value.Through money, value can be easily and quickly transferred from one place to another because money is acceptable everywhere and to all.  For example, it is much easier to transfer one lakh rupees through bank draft from person A in Amritsar to person B in Bombay than remitting the same value in commodity terms, say wheat.
  10.  1. Distribution of National Income:  Money facilitates the division of national income between people.  Total output of the country is jointly produced by a number of people as workers, land owners, capitalists, and entrepreneurs, and, in turn, will have to be distributed among them.  Money helps in the distribution of national product through the system of wage, rent, interest and profit.  2. Maximization of Satisfaction:  Money helps consumers and producers to maximize their benefits.  A consumer maximizes his satisfaction by equating the prices of each commodity (expressed in terms of money) with its marginal utility.  Similarly, a producer maximizes his profit by equating the marginal productivity of a factor unit to its price.
  11. 3. Basis of Credit System:  Credit plays an important role in the modern economic system and money constitutes the basis of credit.People deposit their money (saving) in the banks and on the basis of these deposits, the banks create credit. 4. Liquidity to Wealth:  Money imparts liquidity to various forms of wealth.In fact, all forms of wealth (e.g., land, machinery, stocks, stores, etc.) can be converted into money.
  12.  Barter is an alternative method of trading where goods and services are exchanged directly for one another without using money as an intermediary. It is an old method of exchange. People exchanged services and goods for other services and goods in return.
  13.  1. Lack of Double Coincidence of Wants  2. Lack of a Common Measure of Value  3. Indivisibility of Certain Goods  4. Difficulty in Storing Value  5. Difficulty in Making Deferred Payments  6. Limitations of portability
  14.  Credit Money  Plastic Money  Electronic Money
  15.  Animal money: in historic 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.  Commodity Money:In the earliest period of human civilization, any commodity that was generally demanded and chosen by common consent was used as money.Goods like furs, skins, salt, rice, wheat, utensils, weapons etc. were commonly used as money. Such exchange of goods for goods was known as ‘Barter Exchange’.
  16.  sometime around 1,100 B.C., the Chinese moved from using actual tools and weapons as a medium of exchange to using miniature replicas of the same tools cast in bronze.  Nobody wants to reach into their pocket and impale their hand on a sharp arrow so, over time, these tiny daggers, spades and hoes were abandoned for the less prickly shape of a circle, which became some of the first coins.  Although China was the first country to use recognizable coins, the first minted coins were created not too far away in Lydia (now westernTurkey)
  17.  Metallic Money:  With progress of human civilization, commodity money changed into metallic money.  Metals like gold, silver, copper, etc. were used as they could be easily handled and their quantity can be easily ascertained.  It was the main form of money throughout the major portion of recorded history.
  18.  Paper Money:  It was found inconvenient as well as dangerous to carry gold and silver coins from place to place .So , invention of paper money marked a very important stage in the development of money.  Paper money is regulated and controlled by Central bank of the country (RBI in India).At present, a very large part of money consists mainly of currency notes or paper money issued by the central bank.
  19.  Credit Money:  Emergence of credit money took place almost side by side with that of paper money.People keep a part of their cash as deposits with banks, which they can withdraw at their convenience through cheques.The cheque (known as credit money or bank money), itself, is not money, but it performs the same functions as money.
  20.  Banks have been around since the first currencies were minted, perhaps even before that, in some form or another. Currency, particularly the use of coins, grew out of taxation. In the early days of ancient empires, a tax of one healthy pig per year might be reasonable, but as empires expanded, this type of payment became less desirable. Additionally, empires began to need a way to pay for foreign goods and services, with something that could be exchanged more easily. Coins of varying sizes and metals served in the place of fragile, impermanent paper bills.
  21.  The First Bank  The Romans, great builders and administrators in their own right, took banking out of the temples and formalized it within distinct buildings. During this time moneylenders still profited, but most legitimate commerce, and almost all governmental spending, involved the use of an institutional bank.
  22.  Plastic Money:  “Charg-it” was the first actual bank card and was issued in 1946.The card was invented by a banker in Brooklyn, by the name of John Biggins. However, only local purchases could be made.  later on American Express and Bank of America (BANK AMERICARD) introduced credit cards in Later on IBM attached Magnetic stripe to the cards.The ATM (Automated Teller Machine) was brought into existence in the 1960’s by John Shepperd-BarronVisa and Mastercard took the plastic money to international level in early 70s.
  23.  Electronic Money  In 1983, David Chaum from USA founded a company Digicash.In 1997, Coca-Cola offered buying from vending machines using mobile payments and PayPal emerged in Before that E-gold was established in 1996 which promoted digital currency backed by Gold.Mobile wallets evolved simultaneously from 2005 ( Spain – Mobipay) to Google Wallet in 2011
  24.  A crypto currency is a type of digital token that relies on cryptography for chaining together digital signatures of token transfers, peer-to-peer networking and decentralization of currency.A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet.
  25.  Fiat money gets its value from a government order (i.e. fiat). That means, the government declares fiat money to be legal tender, which requires all people and firms within the country to accept it as a means of payment. Unlike commodity money, fiat money is not backed by any physical commodity.Its intrinsic value is significantly lower than its face value. Hence, the value of fiat money is derived from the relationship between supply and demand.  In fact, most modern economies are based on a fiat money system.
  26.  Fiduciary money is money that is accepted as a medium of exchange due to the trust that exists between the payer and the payee. Cheques and bank notes are examples of fiduciary money because they are both tokens that are used as money and have the same value.
  27.  Fiduciary money depends for its value on the confidence that it will be generally accepted as a medium of exchange.  Unlike fiat money, it is not declared legal tender by the government, which means people are not required by law to accept it as a means of payment.  Instead, the issuer of fiduciary money promises to exchange it back for a commodity or fiat money if requested by the bearer.  As long as people are confident that this promise will not be broken, they can use fiduciary money just like regular fiat or commodity money. Examples of fiduciary money  include cheques or drafts.
  28.  Medium of exchange,  store of value,  standard for deferred payments,  transfer of value,  imparts liquidity to wealth,  distribution of National Income  Helps consumers gain maximum satisfaction by equalizing marginal utility with price  Basis of capital formation and investments  Instrument and index for socio-economic growth  Provides base for accounting and financial decisions  Facilitates national as well as International trade
  29.  Universal acceptability Difficult to duplicate  High Value  Scarce  Supported by respective government  Durable  Easily Portable  Effectively supervised by monetary authority
  30.  Economic Defects Unstable in value  Unequal distribution of wealth and income  Over and under issue of money  Black money  Non-economic defects  Creates social hierarchy and social imbalance  Improper utilization of money : speculations, gambling, etc  Political Instability