Money in Economics



INTRODUCTION



Money is used everywhere in the world but has different
names throughout the world. Each country has its own nomenclature of money. In
spite of having different names in different parts of the world, money performs
the same set of functions everywhere. It is used as a Medium of Exchange, an Accounting
Unit and a Store of value. In this report major functions of money, its
advantages and future of modern money in the digital age will be discussed while
taking inflation factor and time value of money into consideration.










ECONOMIC CONCEPT OF MONEY



The functions
of money are:-


Money is used as a Medium of Exchange:-



It is used
in exchange for goods and services and accepted widely by everyone in return for
their goods and services. Previously a barter system was used to complete
business transactions which involved goods in exchange of goods (Islahi, 2015).
This system had its own demerits as a person accepting anything in barter
system may not find it useful to his or her use. Thus a uniform unit came into
place in the name of money. Now a person accepting money can easily find his or
her goods or services in exchange for the same money.





Money is used as a measure of value or Unit of
value:-



Money is
used as a unit of value for every goods or service in the economy. It is the
uniform unit of measurement of various products without which business
transactions will be impossible. For example, Milk is measured in litres, the cloth
is measured in metres and so on. Now if milk is exchanged in return of cloth
then the unit of value will be unidentified in the absence of money. Money acts
as a common unit of transaction. Without a value, it is also impossible to
organise a specialised production and marketing process of a product.
Production Line Managers can perform a detailed analysis of all the factors of
productions such as raw materials, labour, power consumptions, and overhead
expenses with the help of common measuring unit. In order to check efficiency, they can compare the hourly production output of individual labours with their
hourly wage rate. Also, the marketing team can perform a detailed analysis of the
market of the product as well as the competition so as to make a proper
marketing strategy.





Money being a Standard of deferred payment:-



Any
payment which can be made later is termed as deferred payment. Deferred
payments can be made only by using a standard unit like money. Money being a
standard of deferred payments simplifies the process of borrowing and lending
as it has a value. Thus stock exchanges, banks, mutual funds and investment
trusts have come into place.





Money acts as a store of value:-



Money can
be found in the form of Coins and Currency notes in the economy. Money can be
stored in liquid form for future uses and contingencies. Any kind of goods or
services can be bought in exchange for the stored money in future. Being liquid
in nature it can be easily converted into any commodity as and when required.
This function of money only influences people to invest in shares, mutual
funds, insurance policies along with deposits in banks and financial institutions.








Advantages of money are:-



1.      Paper currency notes are highly
economical to the government of any country because it involves much less
investments in paper printing machines, dyes and printing paper. It forms the
cheapest medium of exchange. Cost of normal wear and tear of metallic coins can
also be avoided.


2.      Money in the form of paper can be
carried to many distant places without much inconvenience having no carrying
costs, unlike barter products. Today is a digital age, money can be carried
in small ATM cards, e-wallets so that instant payments can be made irrespective
of national borders.





Time value of money



The value of money fluctuates with time as it has a potential
capacity to earn more money. Due to the high influence of inflation rate in the
economy, money available today is worth more than the same money in the future
(Khan Academy. 2019). Money can also earn interests if invested properly. Today
investors are very knowledgeable and they perform thorough calculations before
investing money. Key finance metrics are used to derive an expected return on
investment. In all the finance calculations the concept of the time value of money
forms the basis. There are five variables needed to calculate the time value of
money:-


●       Present Value


●       Future Value


●       Number of Periods


●       Interest Rate


●       Payment amount


The total stock of money circulating in the economy is called Money Supply. A detailed analysis of money supply based on valued
facts is necessary for policymakers of any country to formulate a proper macroeconomic
policy which will affect the business cycle and the economy. Money supply data
is published regularly by the governments using the monetary aggregates used by
them. The monetary aggregates generally used are M0, M1, M2, M3 and M4. A short
description of the monetary aggregates is as follows:-


●       M0 and M1 are also termed as Narrow
money including coins and currency notes and other money equivalents which can
be easily converted into hard cash.


●       M2 includes M1 along with Short term
bank deposits and few money market funds.


●       M3 includes M2 along with long term
deposits.


●       M4 includes M3 plus all deposits in
post office savings banks.


Governments
of every country fluctuates the total money supply in the economy as a part of
their economic policies. An increase in money supply lowers the interest rate
resulting in more investments as there is more money with the consumers thus
encouraging spending. There will be an increase in production in an economy
along with the demand for labour (Spread, 2015). The opposite occurs when the money
supply falls. Nowadays, inflation is also taken into consideration in
formulating money supply policies because it affects the overall wealth of the
economy.





CONCLUSION



In modern-day money has different forms and it is used in
different situations to meet the needs of the people. Digital money is introduced
in the economy as a mode of faster payments however more secured digital
payments platforms must be built as there are lots of incidents of frauds and
scams. Awareness must be spread among the people to use digital money as it
involves zero carrying costs which cost negligible to the government. If
Inflation is controlled in a systematic way then there will be effective wealth
maximisation for all class of the society.






























References



Islahi, A. A. (2015). Economic
Concepts of Ibn Taimiyah (Vol. 12). Kube Publishing Ltd.


Khan Academy. (2019). Macroeconomics
| Economics and finance |Khan Academy. [online] Available at:
https://www.khanacademy.org/economics-finance-domain/macroeconomics [Accessed 2
Apr. 2019].


Lavoie, M. (2018). Rethinking
macroeconomic theory before the next crisis. Review of Keynesian
Economics, 6(1), 1-21.


Spread, P. (2015). The
Evolution of Economies: Money-bargaining, economic change and industrial
revolution. Rutledge.