Introduction To Money
Money is anything that is generally accepted as a medium of exchange, a measure of value, store of value, and the means for the standard of deferred payment. In this post I will be providing an introduction to the money, with the following concepts:
- Barter system
- Drawbacks of the barter system
- CC Economy
- Component of money
- Money supply
Let’s start the introduction to money.
Barter System is an old system when money was not introduced in the economy.
Under the barter system, goods are exchanged for other goods. Sometimes, animals were also exchanged for land, etc.
Drawbacks of barter system
- Barter System requires a double-coincidence of wants- It means if the consumer is looking to trade orange for apple, then the other party is looking to trade an apple for an orange.
- It is a time-consuming process- finding the right party to exchange the commodity, requires a lot of time.
- It lacks a common unit of exchange- There was no standard unit defined in terms of a commodity or in terms of quantity. For example, people used to trade 10 kg wheat for a cow or even for a piece of land, this trade was unfair for many.
CC Economy refers to Commodity for Commodity economy.
Under this system, only commodities are exchanged for the commodities.
Components of money
Components of money are:
- Banker’s cheque
- Plastic money
The money supply and supply of money are the same. It refers to the total volume of money held by the public at a particular point in time in an economy. It is a stock concept.
Money supply is denoted by M1.
M1 = CURRENCY HELD BY THE PEOPLE + NET DEMAND DEPOSITS HELD BY COMMERCIAL BANKS + OTHER DEPOSITS WITH RBI
M1 is the most liquid form of money. It includes cash at the bank and cash in hand.
Now, I will be explaining each part of M1:
1. Currency held by people
It consists of paper notes and coins held by the public. Any currency held with the government and bank is not included in it.
It includes coins or denominations (Which notes you want INR 100/ INR 500, etc) of notes.
Coins includes like Rupee 1, 2, 5, 10.
Paper notes of denomination 5, 10, 50, 100, 200, 500 and 2000.
Currency money is also termed as Fiat money. Fiat money is the one that is issued by the order of the Government such as the notes and coins in the circulation.
Currency money is also termed as legal tender money. It means money can be legally used to make payments of debts or other obligations
2. Net Demand deposit held with commercial banks
It refers to the demand deposits of the public with commercial banks. Demand deposits are the ones that are available on the demand by the depositors. Like a cheque.
3. Other deposits with RBI
It includes miscellaneous like the money stuck which is not withdrawn from the dormant account or the money where there is no one to claim.
Functions of Money
1. Medium of Exchange
Money can be used to exchange for buying goods and services. For example, you pay money to get teaching services.
2. Measure of Value
Every commodity is assigned a specific monetary value. For example, to buy a bottle of coke we pay specific money to the seller.
3. Store of Value
Money can be stored or invested. It will not get spoiled or destroyed or even expired. For example, investing in bonds, or even keeping cash at home.
4. Standard of deferred payment
Money can also be used to make payments later. For example, buying a car on loan or paying via credit card. Hence, money helps in making future payments. Deferred means the future.
Thanks for reading.
You can read the related post on macroeconomics:
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