Money :Meaning, Evolution and Functions

K K Dubey (PGT Eco) UNIT : MONEY AND BANKING Class: XII

BARTER SYSTEM Direct exchange of goods for goods is called barter system. An economy based on barter exchange is called commodity economy

Drawbacks of Barter System Absence of common measure of value Lack of double coincidence of wants Absence of means of subdivision Difficulties in storing wealth Lack of satisfactory units to engage in contracts

Need for a common measure and unit of account ? MONEY

“Money is, what MONEY does !” What is MONEY? “Money is, what MONEY does !”

FUNCTIONS OF MONEY Primary Functions: 1. Medium of Exchange 2. Measure of value Secondary Functions: 3. Store of Value 4. Standard of Deferred payments 5. Transfer of Value

Money as a Medium of Exchange It is the most essential function of Money. It can be used as a medium of making payments for all goods and services. The major difficulty of Barter system, lack of double coincidence of wants has removed. It has the quality of general acceptability. Purchase and sale of goods can be conducted independently of one another.

Money as a Measure of Value All prices of goods and services are expressed in terms of Money It works as a common denomination for value of goods and services It simplifies the process of exchange It works as a measuring rod which expresses the value of goods and services It permits to compare the relative values of any two commodities.

Money as a Store of Value It is the most convenient way to store wealth It provides security to individuals to meet unforeseen contingencies, emergencies and to pay future debts It helps to transfer purchasing power from present to future Money is easy to store and is not perishable

Money as a Standard of Deferred Payments Money serves as a standard of debt Deferred payments refers to, payments which are to be made in near future Use of money immensely simplified the borrowing and lending operations Money acts as Standard of Deferred Payments due to: a. Value of money remains almost constant b. It is generally accepted c. It is more durable as compared to goods

Money as a Transfer of Value It transfers the value of durable and immovable goods from one place to another It provides mobility to machinery, land and goods, which accelerates trade and industry It has the merit of liquidity Money is the most liquid of all asset

“Money is anything which is generally accepted as a medium of exchange, measure of value, store of value and means for standard of deferred payments”

Barter System and Money

Money has overcome the Drawbacks of Barter System Removes the problem of lack of double coincidence of wants Provides a common measure of value Goods can be stored easily and economically Simplifies borrowing and lending operations It is the most liquid asset Barter Economy Lack of double coincidence of wants No common measure of value Difficulty in storing perishable goods and is expensive Difficulty in borrowing and lending operations Lacks liquidity

Evolution of Money

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