Money is anything that is generally accepted as a medium of exchange, a measure of value, a store of value & means for the standard of deferred payments. Here are money class 12 notes.
Topics Discussed
Barter System
It is a system in which there is an exchange of goods for goods.
Barter Economy
It is an economy where there is a direct barter of goods & services. It is also known as the CC economy (where C stands for a commodity).
Limitations of Barter Exchange
- Lack of Double Coincidence of Wants: The Barter system can work only when both buyers and sellers are ready to exchange each other’s goods.
However, such a double coincidence is rare. For example: A can exchange goods with B only when A has what B wants & B has what A wants. - Lack of Common Measure of Value: In a barter system, all the commodities are not of equal value and there is no common measure of value of goods and services in which exchange ratios can be expressed.
For example: If A has wheat & B has rice then it is very difficult to decide how much wheat is needed to exchange with 1 kg of rice. - Lack of Store of Value: Under the barter system, it is difficult for people to store wealth for future use because most of the goods do not possess durability. Wheat, rice, etc. can’t be stored for a longer time as their quality decreases with time. Also, storage of goods requires time & effort.
- Lack of Standard of Deferred Payments: Under barter system contracts involvement future payment or credit transactions cannot take place with ease because of the following reasons:
a) It is not possible to arrange goods of the same quality at the time of repayment.
b) The commodity may lose or gain its value at the time of repayment. Therefore it is difficult to make deferred payments in the form of goods.
Features of Money
All the limitations of the barter system are the features of money. To illustrate once more here they are:
1) Medium of Exchange
2) Measure of Value
3) Store of Value
4) Standard of Deferred Payments
National Income Class 12 Notes All Formulas
Money Supply
It refers to the total value of money held by the public at a particular point of time in the economy.
It is a stock concept as it is concerned with a particular point in time.
Measures of Money Supply
There are 4 alternative measures of money supply.
1) M1
It is the first measure of money supply & includes:
- Currency & Coins with Public
- Demand Deposits of Commercial Banks
- Other Deposits with RBI
It is also known as transaction money because it is used for making transactions.
M1 = Currency & Coins + Demand Deposits with Commercial Banks + Other Deposits with RBI
Note: Demand deposits are deposits, which can be encashed by issuing cheques at any time by the account holders. A demand deposit is treated as equal to currency held as it is readily accepted as a means of payment.
2) M2
It is a broader concept of money supply as compared to M1. In addition to M1, it also includes saving deposits with post office savings banks.
M2 = M1 + Saving deposits with post office saving banks
M3
This concept is broader as compared to M1. In addition to M1, it includes net time deposits with banks.
M3 = M1 + Net time deposits with banks
M4
This includes total deposits with post office saving banks in addition to M3.
M4 = M3 + Total deposits with post office saving banks
Important things to keep in mind
- M1 is the most liquid & M4 is the least liquid.
- M3 is widely used as a measure of money supply & it is also known as aggregate monetary resources of the society.
- M1 & M2 are generally known as narrow money supply concepts whereas M3 & M4 are known as broad money supply concepts.
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