Market
In ordinary language market means a place where things are bought and sold, but in Economics the market does not mean a particular place or bazar, it only means a commodity and a group of buyers and sellers of the same. Thus we speak of cotton market or share market etc. Same are willing to buy and others are willing to sell. The buyers and sellers can with one another by verbal, by letter, telephone, internet etc but place does not matter.
Classification of Market
Categories of market are:
1. Perfect market
2. Imperfect market
Again categories are classified into:
Market on the Basis of Time
On the basis of time market could be classified into the following kinds:
1. Day–to-Day Market
This type of market is concerned with goods that are perishable like milk, fish, vegetable, fruits etc. The price in this market is determined by the demand of the market. If the demand expands the period is short that the supply can’t be increased immediately at all, therefore the price will increase similarly if demand decrease the time is so short that the surplus supply can’t be stored due to the perishability of the goods, obviously the price will decrease.
2. Short Period Market
It is the market when time allows supply to adjust with the demand of the market to the extent of available size of the firm or producing units. For example: If market demand is so goods per day and particular firm of the same goods could produce max: 100 units by using its full production capacity .If demand increases from 50 to 75 units the firm can supply utilising the unused capacity, but if demand becomes 120 it can’t be satisfied by existing production capacity because total size of firm is 100 units per day.
3. Long Period Market
When the period is so long that the supply can adjust with the demand of the market by changing the size of the firm. If the demand of the market increases immediately the prices will also increase. This increase of price will expand the margin of profits of the producers therefore the firm can increase the production through employing more labor, more machines , raw material etc. By increasing supply reduces the increased prices and they come again on the previous point. Similarly if demand falls the price also decrease and producers curtail their production due to decrease in margin of profits. As consequence of curtail in production the depressed price goes up again on the previous point.
Market on the Basis of Location
Markets can be classified on the basis of location.
1. Local Market
If the goods are sold and purchased in a limited area is called local market. For example: If the goods produced in Karachi are sold in Landhi or Malir, it will be the example of local market. Local market generally is concerned with the perishable good like milk, fish, bricks etc.
2. National Market
This is the kind of the market which covers the whole of the country. For example: the textiles of Karachi are sold in all the four provinces of Pakistan. Similarly sports goods produced in Sialkot are supplied in whole the country.
3. International Market
When the goods produced locally are sold in all the countries of the world is called International market. For example: the cars produced in Japan are sold in whole of the world. The buyers and sellers from all over the world compete with one another therefore prices are influenced by the world environment.
Market on the Basis of Nature of Goods
1. General Market
Market is said to be general where not a specific but general goods are sold and purchased. For example: if cloth, pots, shoes, vegetable, fruit are sold at a time it will be called general market.
2. Specialised Market
In this market special or specific goods are brought to sale in this kind of the market. For example: grains are sold in grain market similarly fruits are sold and purchased in fruit market. These markets provide facility to the buyers that they could purchase goods of their
Showing posts with label Class XI (BIEK) Notes. Show all posts
Showing posts with label Class XI (BIEK) Notes. Show all posts
Priniciple of Economics XI - Gold Standard
Gold Standards
Country is said to have gold standard when gold the standard of value or when gold is the basis of all currency. There are four types of gold standard.
Gold Currency Standard
This is the oldest type of gold standard and is called full gold standard. A country is said to be full gold standard when gold serves not only as a standard of value but also circulates as coins. Britain, U.S.A, France, Germany and other European countries had this type of gold standard before 1914.
Gold Bullion Standard
Under this system the value of the currency is fixed in terms of gold by making such currency convertible in to gold (bullion, not coins). Gold does not circulate as coins. The countries where this system prevailed gold may move freely into or outside the country. No gold coins circulated. The idea was to make it available only for foreign payments.
Gold Exchange Standard
It is the gold standard for making foreign payments only; inside the country the people use token coins and paper notes. For making foreign payments the external value of the home currency convertible in to gold and the currency authority of the home country is ever prepared to make available the foreign currency in exchange of home currency. When the home country’s nationals receive payment from abroad in the form of currencies convertible into gold the currency authority of the home country converts it into home currency.
Two reserves are kept to ensure the smooth working of this system. One reserve is kept in the form of home currency inside the country and another reserve is kept at a foreign center in gold. When the home country has to receive payments from abroad then gold or foreign currency convertible in to gold is paid in to the reserve kept at the foreign center and in exchange the international currency is issued from home reserve.
When payments have to be made abroad then the internal currency is paid to the currency authority with in the home country and is and is put in to the home reserve. The currency authority give in exchange gold out of the reserve kept at the foreign center.
One of the greatest defects of gold exchange standard is that it is too complicated. It is not automatic. It requires unnecessary duplication of reserves.
Gold Parity Standard
It is latest to enter the gold standard. It is the type, which prevails under the aegis of IMF. In this system the internal currency consist largely of notes and some form of metallic coins but not of gold, nor these notes are convertible in to gold coins, gold bullions a foreign currency based on gold. But the only respect that gold comes in to play under this system is that the currency authority takes upon itself, the obligation of maintaining the exchange rate of the domestic currency stable in terms of certain quantity of gold. This is the type of gold standard, which the member countries of the IMF are supposed to have.
Advantages of Gold Standard
1. It is an objective system and is not subject to changing policies of the government or the currency authority.
2. It enables the country to maintain the purchasing power of its currency for a very large time.
3. It preserves and maintains the external value of the currency (rate of exchange) within narrow limits. It provide fixed exchanges which is great bourn to traders and investors.
4. It gives the advantages of an international foreign currency. It creates an international measure of value.
5. It inspires confidence and contributes to national prestige.
Country is said to have gold standard when gold the standard of value or when gold is the basis of all currency. There are four types of gold standard.
Gold Currency Standard
This is the oldest type of gold standard and is called full gold standard. A country is said to be full gold standard when gold serves not only as a standard of value but also circulates as coins. Britain, U.S.A, France, Germany and other European countries had this type of gold standard before 1914.
Gold Bullion Standard
Under this system the value of the currency is fixed in terms of gold by making such currency convertible in to gold (bullion, not coins). Gold does not circulate as coins. The countries where this system prevailed gold may move freely into or outside the country. No gold coins circulated. The idea was to make it available only for foreign payments.
Gold Exchange Standard
It is the gold standard for making foreign payments only; inside the country the people use token coins and paper notes. For making foreign payments the external value of the home currency convertible in to gold and the currency authority of the home country is ever prepared to make available the foreign currency in exchange of home currency. When the home country’s nationals receive payment from abroad in the form of currencies convertible into gold the currency authority of the home country converts it into home currency.
Two reserves are kept to ensure the smooth working of this system. One reserve is kept in the form of home currency inside the country and another reserve is kept at a foreign center in gold. When the home country has to receive payments from abroad then gold or foreign currency convertible in to gold is paid in to the reserve kept at the foreign center and in exchange the international currency is issued from home reserve.
When payments have to be made abroad then the internal currency is paid to the currency authority with in the home country and is and is put in to the home reserve. The currency authority give in exchange gold out of the reserve kept at the foreign center.
One of the greatest defects of gold exchange standard is that it is too complicated. It is not automatic. It requires unnecessary duplication of reserves.
Gold Parity Standard
It is latest to enter the gold standard. It is the type, which prevails under the aegis of IMF. In this system the internal currency consist largely of notes and some form of metallic coins but not of gold, nor these notes are convertible in to gold coins, gold bullions a foreign currency based on gold. But the only respect that gold comes in to play under this system is that the currency authority takes upon itself, the obligation of maintaining the exchange rate of the domestic currency stable in terms of certain quantity of gold. This is the type of gold standard, which the member countries of the IMF are supposed to have.
Advantages of Gold Standard
1. It is an objective system and is not subject to changing policies of the government or the currency authority.
2. It enables the country to maintain the purchasing power of its currency for a very large time.
3. It preserves and maintains the external value of the currency (rate of exchange) within narrow limits. It provide fixed exchanges which is great bourn to traders and investors.
4. It gives the advantages of an international foreign currency. It creates an international measure of value.
5. It inspires confidence and contributes to national prestige.
Priniciple of Economics XI - Barter System
Introduction
Barter economy means the exchange of commodities. It consists if a bargain of commodity with the other with out the help of another of exchange, such as money. Therefore we can say that buying goods against goods is called barter system.
The barter system can easily be understood with the help of the following example. Suppose Mr. A is a farmer and produces wheat in his fields. When the crop is ready A finds that he can stock as much wheat as his family need for the whole year and still he will have a surplus which he can use for exchange purpose. Now he has to get his plough repaired through a carpenter. After availing the services of the carpenter, Mr. A makes him the payment in the form of wheat in exchange of his services. Again Mr. A wants to purchase cloth and goes to merchant’s shop. Here he exchanges the desired quantity of cloth with surplus wheat. Thus the process will keep on continuing and the needs and wants will be satisfied by making use of any commodity as the medium of exchange.
Defects of Barter System
Following are some of the difficulties of the barter system.
1. Double Coincidence of Wants
Barter requires a double coincidence of wants. If a person for insistence has wheat and wants to exchange it with cotton, he has to find a person possessing cotton and requiring wheat. It was possible only when the people lived in small areas and their wants were too limited.
2. Lack of Common Measures
There was no fixed measure in which two things could be exchanged. It means every one did not derive complete satisfaction out of his deal. The ratios of exchange were fixed accordingly to the necessities and demands of the parties. One party had to suffer under these conditions were each transaction is an isolated transaction.
3. Lack of Divisibility
Another great disadvantage of barter system was the lack of divisibility. Suppose a man possess horse and requires wheat and cotton in exchange but both of these commodities may not be obtained from one man. One person may have wheat another has rice in surplus and both of them want to exchange their commodities with the horse. Now the horse cannot be divided and fence the transaction may not be completed.
4. Lack of Store of Value
Under the barter system wealth consisted of non-durable goods, which are quickly perished or detoriated with the passage of time. There value may not be stored for long period. Hence no body could think of storing something to provide against future.
5. Inconvenient Media of Exchange
Commodities like little wheat or other things alike cannot be easily transported and thus have little value. Therefore under barter system the mediums of exchange were really inconvenient.
How Money Removed The Difficulties of Barter
With the help of money it has now become possible to over come the inconveniences of barter system.
1. Standard of Value
Under the system of exchange i.e. sales and purchase the value of each commodity is expressed in terms of standard of value such as gold or silver.
2. No need of Double Coincidence
Under monitory economy there is no such need of such two persons whose surplus suits with each other wants.
3. Sub-Division of Articles is Not Necessary
Money has solved the difficult of sub-divisibility of some of the commodities with out any loss. Under this system if any one needs urgent cash and has some valuable he can simply sell it in the market and get the desired money.
4. Store of Value
Money has provided man an opportunity to save money in the form of liquid cash that helps him to preserve his assets for a longer period of time and avoid any unseen stringencies.
5. Large-scale Production
Large scale of production is possible by the use of money, which was not possible under barter economy.
Summing Up
Thus money or sale and purchase system has removed all the difficulties of barter economy.
Barter economy means the exchange of commodities. It consists if a bargain of commodity with the other with out the help of another of exchange, such as money. Therefore we can say that buying goods against goods is called barter system.
The barter system can easily be understood with the help of the following example. Suppose Mr. A is a farmer and produces wheat in his fields. When the crop is ready A finds that he can stock as much wheat as his family need for the whole year and still he will have a surplus which he can use for exchange purpose. Now he has to get his plough repaired through a carpenter. After availing the services of the carpenter, Mr. A makes him the payment in the form of wheat in exchange of his services. Again Mr. A wants to purchase cloth and goes to merchant’s shop. Here he exchanges the desired quantity of cloth with surplus wheat. Thus the process will keep on continuing and the needs and wants will be satisfied by making use of any commodity as the medium of exchange.
Defects of Barter System
Following are some of the difficulties of the barter system.
1. Double Coincidence of Wants
Barter requires a double coincidence of wants. If a person for insistence has wheat and wants to exchange it with cotton, he has to find a person possessing cotton and requiring wheat. It was possible only when the people lived in small areas and their wants were too limited.
2. Lack of Common Measures
There was no fixed measure in which two things could be exchanged. It means every one did not derive complete satisfaction out of his deal. The ratios of exchange were fixed accordingly to the necessities and demands of the parties. One party had to suffer under these conditions were each transaction is an isolated transaction.
3. Lack of Divisibility
Another great disadvantage of barter system was the lack of divisibility. Suppose a man possess horse and requires wheat and cotton in exchange but both of these commodities may not be obtained from one man. One person may have wheat another has rice in surplus and both of them want to exchange their commodities with the horse. Now the horse cannot be divided and fence the transaction may not be completed.
4. Lack of Store of Value
Under the barter system wealth consisted of non-durable goods, which are quickly perished or detoriated with the passage of time. There value may not be stored for long period. Hence no body could think of storing something to provide against future.
5. Inconvenient Media of Exchange
Commodities like little wheat or other things alike cannot be easily transported and thus have little value. Therefore under barter system the mediums of exchange were really inconvenient.
How Money Removed The Difficulties of Barter
With the help of money it has now become possible to over come the inconveniences of barter system.
1. Standard of Value
Under the system of exchange i.e. sales and purchase the value of each commodity is expressed in terms of standard of value such as gold or silver.
2. No need of Double Coincidence
Under monitory economy there is no such need of such two persons whose surplus suits with each other wants.
3. Sub-Division of Articles is Not Necessary
Money has solved the difficult of sub-divisibility of some of the commodities with out any loss. Under this system if any one needs urgent cash and has some valuable he can simply sell it in the market and get the desired money.
4. Store of Value
Money has provided man an opportunity to save money in the form of liquid cash that helps him to preserve his assets for a longer period of time and avoid any unseen stringencies.
5. Large-scale Production
Large scale of production is possible by the use of money, which was not possible under barter economy.
Summing Up
Thus money or sale and purchase system has removed all the difficulties of barter economy.
Priniciple of Economics XI - Money
Definition
Money is some thing, which has general acceptability in the settlement of debt, or in transfer of ownership of goods and services in a country. The value of exchange of every thing in a country is expressed in terms of money.
Mr. Robertson defines money in the following words
“Money is a commodity which is widely accepted in payment of goods or in discharge of other kinds of business obligation”.
An English economist Mr. Hawtrey observes that
“Money is one of those concepts which are definable primarily by the use or the purpose which they serve”.
In the words of Goh Cole,
“Money is purchasing power some thing that buys things”
According to Ely,
“Any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts”.
One of the simplest definitions of money is given by Mr. Walker who says that
“Money is what money does”.
In the light of the above definitions, it can be said that
“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.
Functions of Money
Money is said to perform the following functions
1. It serves as a medium of exchange.
2. It is used as a store of value.
3. It acts as an instrument of deferred payment.
4. It is a measure of value.
These are further discussed below
1. Medium of Exchange
The most general function of money is that it serves as a medium of exchange. The ownership in goods and services is exchanged through it. Money is accepted in exchange of goods and services and property rights simply because in its turn money can be exchanged for them at such places and times the possessor wishes. It means any thing can be brought and sold through it. Money acquires the capacity of serving as a medium of exchange also because of legal sanctions behind it and as such it is generally accepted in the settlements of debts or any financial transaction.
2. Measure of value
Money is used as a measure of value in the sense that the value of every thing is demanded in terms of money. As a measure of value money not only facilitates business transactions but is also useful transacting the sale and purchase if immovable properties buying at distant places. Money as a measure of value is also helpful in asserting the financial worth or stability of a business unit or an industrial concern which is possible from the study of their balance sheets containing the value of their assets and liabilities in terms of money. In simple words we can say that function of money as a measure of value helps us almost in every aspect of our daily life.
3. Store of Value
Another function of money is that it serves as a store of value. We can keep our assets in liquid form so that they can be used any time we feel of doing so. A unique feature of our daily life is that the flow of income does not correspond with the expenditure. The income in the majority of cases does not come to us with the same intervals as we have to make payments and consequently their adjustment would have been difficult but money, serving as a store of value makes a happy adjustment possible between the flow of income and expenditure intervals. Due to its value payments for the future can be made.
4. Instrument of Deferred Payment
Money also acts as an instrument of differed payment, which means that transactions requiring deferred payment are made possible through it. It so happens because the value of money having legal sanction behind, is more stable in comparison to other goods the value of which are liable to great fluctuation under the influence of their demand and supply position. The value of money being stable the parties in transaction are assured of getting the same value even after some time if the payments are made in terms of money. It means that money serving as an instrument of deferred payment facilitates credit transactions. Similarly for the same it encourages lending and borrowing which stimulate saving and investment and ultimately accelerates the economic growth of a country.
5. Transfer of Value
Money has simplified the process of transfer of value from one place to another with out losing its worth. Money is readily accepted by all without any difficulty. It is even possible to transfer a billion of rupees from one place to another.
Types of Money
Generally the classification of money is based on the material that is being used for the purpose. According to the material used, the money can be classified as:
1. Metallic Money
The currency in use or to be used when is made of some metal; it is known as metallic money. The metallic money usually consist of coins made up of gold, silver, copper, bronze etc. a characteristic of these coins is that they are properly shaped and stamped by the central issuing authority to prevent any misuse. In today’s modern age of business the coins are Marley used and issued. The metallic money is further classified as:
Classification of Metallic Money
Full Bodied Coin
Full bodied coin is the one, the face value of which is equal to the quantity of metal used in it. In this case the face value of the coins is equal to its intrinsic value.
Token Coins
A token coin or money is the one whose face value is higher than the value of the metal contained in it. It is usually as a subsidiary unit or coin. In token coin the face value is higher than the intrinsic value.
2. Paper Money
Paper currency refers to the currency notes issued or used in a country. These notes are made up of special kind of paper. Paper currency also includes notes (promissory) and cheques but they circulate as money only in the countries where they are used freely for settling business transactions such as U.S.A and U.K.
In early times when notes were introduced they were backed by an exactly equal amount in gold or silver kept by the issuing authority. Paper money is not wholly backed by some precious metal now. only a proportionate reserves are maintained and a good deal of the paper money rests on people’s of people’s confidence in the word of issuing authority generally the government or the central bank. Such a currency is also called fiduciary issue.
Value of Money
The value of money refers to the purchasing power of one unit of money in terms of goods and services. It indicates the quantity of goods and services that can be had in exchange of one unit of money. If the value of money is studied in relation to the home market, it is called internal value as against external value, which gives the value of money in terms of foreign currency.
Value of Money and Price Level
The price level of a country refers to the value of goods and services in terms of money. It means that value of money is expressed in terms of money. As for example, one unit of money supposes fetches 3 seers of wheat and value of 3 seers of wheat is one unit of money. Suppose the value of money rises and its one unit now fetches 5 seers of wheat. It means that the value of wheat has come down and now 5 seers of wheat will fetch one unit of money, which previously only did 3 seers.
From the above example it is evident that value of money is followed by the fall in price level and vice versa. In other words rise in price level makes the value of money fall and the same quantity of money can be had with more units of money. The above fact can also be interpreted as an increase in the quantity of money brings a corresponding fall in the value of money and the fluctuations in the value of money occurs due to a change in the quantity of money. This relationship between value of money and its quantity is explained by quantity theory of money.
Theory
The quantity of money states that other things remaining the same, the value of money falls in proportion to increase in the quantity of money in circulation. It mans that in the case, when the quantity of money increases by 25%, the value of money falls by 25%. Thus the quantity of money and its value of money are inversely related.
Explanation
The value of money like any other commodity is determined by its demand and supply. Thus the quantity theory of money can be explained under these two heads.
1. As Regards Demand of Money
Demand of money according to Fisher is the derived demand i.e. not for direct consumption. Money being a medium of exchange is demanded for the purchasing of goods and services. Demand for money therefore depends upon the demand for goods and services.
2. As Regards Supply of Money
According to Fisher supply of money is represented by the total expenditure made by the people calculated during a given period of time. The total expenditure made by the people is calculated by multiplying the total quantity of legal tender money by its velocity plus the bank money (cheque, drafts etc) multiplied by its velocity. Velocity of money means the number of hands that one unit of money changes during a given period of time. For example a RS 100 note changes 10 hands in a year, its velocity will therefore be 10. It means that total payment made by this note will be .
RS. 100 * 10 = RS. 1000
According to Fisher, supply of money is determined by the following equation.
MV + M‘V’
M represents the actual money and M’ the bank money where as V and V’ represent their respective velocities.
Demand for money is represented by price multiplied by turnover i.e. total quantity of goods and services sold and therefore demand is determined as:
Demand of money = P x T
Where P is the price and T is the turnover.
Since the value of money is determined at a point where its demand is equal to supply and accordingly Fisher gives the following equation of exchange:
PT = M‘V’ + MV
Or
P = (M‘V’ + MV)/T
According to the above definition / equation, the price level is determined by dividing the total supply of money by turnover.
Criticism
The quantity theory of money is theoretically convincing but practically it is consider as a misleading one.
1. The very assumption in the theory that other things remaining same are incorrect. Fisher assumed money as independent variable where as credit (M’) is a function of business activity i.e. the turnover. It means the turnover increases, the supply of bank or credit also increases and consequently money is not an independent variable.
2. Velocity of money and bank money has been assumed is assumed in this theory to be constant where as they are not so because they depend upon business activity which is never constant.
3. The theory fails to explain as to why during depression the increase in supply of money does not bring a corresponding increase in the price level.
4. According to quantity theory high price is the effect of increase in supply of money which is not always true. Scarcity of goods caused by a fall in production or increase in production with respect to an increase in population also raises the price level.
5. It is argued that Fisher’s equation is only valid in a static economy. The economy becomes static beyond full employment level because the physical production does not increase in such a situation. the extra money if introduced in such a stage of economy is not absorbed by increased quantity of output and consequently the price level is directly affected. This shows that Fisher equation in a dynamic economy is of no use.
Importance of Money
In order to have a comprehensive idea of the importance of money, we can classify it as.
1. Importance to individuals in their daily life.
2. Importance to an economy.
1. Importance to Individuals in their Daily Life
Importance to individuals in their daily life is well established under the following heads
i. Removal of Double Coincidence
Money has removed the problems of double coincidence of wants. An individual because of money is in position to exercise his choice and can purchase or consume a commodity according to their liking.
ii. Convenience in Buying and Selling
Money being a measure of value, an individual can sell his goods for money and purchase the goods he needs through it. The sale and purchase of goods is not confined to with in the borders of a country only, but are also conducted abroad.
iii. Ease in Planning
Money has given an opportunity to an individual to plan his consumption in a way that he gets the maximum satisfaction out of his limited income. Because of money price of every thing is known to him on the basis of which he can ascertain that what he can afford and what he cannot.
iv. An Option for Saving
Money being a store of value helps the individual to make provision for rainy days. During the period of his earning, he may have some thing, which he can use in his old age when his earning has reduced.
v. Recovery Options
Money also helps an individual to cover the gap between income and expenditure intervals, which is done either by withdrawing the past saving or by borrowing. Saving and borrowing have become common and a part of our economic activities.
vi. Possibilities of Specialization
Money has made possible the regional specialization of production on the basis of the most favorable condition principle, which has given birth to international division of labour have reduced the cost, improved the quality and increased the verities of products. Individuals are in a position to consume superior goods at a cheaper price.
vii. Transfer of Value
Money being a measure of value helps the individuals to transfer the value of their fixed assets from one places to another in the country or out side the country. In other words even the immoveable assets have become mobile.
viii. A Source of Income
Because of lending and borrowing practices facilitated by money, the individuals saving become a source of income. The individuals make savings, invest them in productive activities and receive a regular income, which increases their welfare by improving their standard of living.
2. Importance to Economy
The economy of a country is however, benefited by money in more than one-way:
i. Enhancing Exchange Facility
Money enhances the exchange facility and extends the market for goods and services produced in the economy. The extension of market creates demand for goods and services and consequently the resources are fully exploited to increase the output so that the inc4reased demand may be adequately met.
ii. Economies of scale
Money oriented demand provides economics of scale. The economy in such a situation produces goods at a cheaper cost because of the reason that input and output ratio rises.
iii. Increased Opportunities of Employment
Increased volume of production increases the level of employment and income level follows suit. Raised income level stimulates saving and investment and consequently the investment rate in the economy rises.
iv. Facilitate International Trade
Through money international trade is facilitated, which makes the resources of an economy more mobile and such resources are exploited to the maximum extent.
v. Introduction of Lending and Borrowing
Because of money lending and borrowing have become a common practice among the nations of the world. The surplus resources o fan economy moves to another economy, which is deficient in such resources. Flow of resources helps an undeveloped to venture into her development plan. Lending and borrowing practices developed through money, exchange saving and stimulate investment n the economy. As a result the economic growth is accelerated.
Dangers of Money
Money has proved dangers in several ways
1. Economic Instability
Some economists of the view that money is responsible for economic instability. When there was no money, saving was not divorced from investment. Those who saved also invested. But in a monetised economy, saving is done by certain people and investment by some other people. Hence, it does not follow that saving and investment should be equal. When savings in a community exceeds investments, then national income output and employment decrease and the economy is engulfed in depression.
2. Danger of Over-Issue
The main danger of money lies in its liability of being aver issued. The over issue of money may result in inflation. Excessive rise in prices hits hard the consuming public. It endangers speculation and inhibits productive enterprises. It adversely effect distribution of income and wealth in the community so that the gulf between the rich and poor widens.
3. Economic Inequalities
Money has proved to be a very continent tool for amassing wealth and exploitation of the poor by the rich. The misery and degradation has gone to a great extant after the existence of money.
4. Moral Depravity
Money has weakened the moral fiber of the man. The social evil like corruption has proved to be a soul-killing weapon. As said by an eminent German economist Von Mises
“Money is regarded as the cause of theft and murder”.
Money is itself is not bad, but its possession or debt facilitates corruption and crime.
Gresham's Law
Concept
Gresham’s law can be stated, as
“Bad money tends to drive good money out of circulation when both of them are full legal tender”.
Thus when two kinds of money good and bad circulate together, other things remaining constant, bad money will remain in circulation and good money will go out of circulation.
Classification of Good and Bad Money
Good and bad money may be classified as:
1. Good money is full valued coins of standard wealth and fineness while bad money is the one, which is debased or worn out.
2. Good money may be superior money of higher substance while bad money will be inferior money of less intrinsic value.
Explanation
In the light of the first classification the law may be stated as:
“Whenever legal tender coins of the same face value but of different weight or degree of fineness are in continuous circulation, the light weight or bad coins tend to drive out the full weight fine coins out of circulation”.
Marshal states the law in the light of second classification as:
“ Money which is inferior in respect to exchange or substance value, commonly shows greater tendency in circulation than those which are superior in this respect”.
Application
The law is applicable in three cases:
Under Mono – Metallism
When coins of same metal but of varying weight or fineness or both circulate together at the same face value, it will be the human tendency to keep a brand new coin and give out the depreciated one. Thus the old and worn out coins will tend to drive newly minted full weight fine coins out of circulation.
Under Bi – Metallism
When gold and silver coins are freely circulated as legal tender, then the over valued coin will drive the under value coin out of the game.
Under Paper Currency
When paper money and metallic money circulate together as standard, however paper money being inferior tends to drive metallic money out of circulation.
The reasons for this are:
Good money is exported to earn profits.
Good money is hoarded for later adjustments.
Good coins are melted and sold as bullion.
Exceptions
The law does not operate when:
There is a shortage of currency.
When there is strong public opinion against bad money.
Bi Metallism
Definition
Bimetallism is a system of currency under which the price of the monitory unit is regulated with reference to any two metals (generally gold and silver). Both the metals act as a medium of exchange and the standard of value. The two metals remain in circulation side by side. The ratio between their values is fixed and maintained by the currency issuing authority.
Essential Features
The essential features of bimetallism are:
1. Standard coins of two metals, generally gold and silver remain in circulation side by side.
2. Coins of each of the metals remain unlimited legal tender.
3. Generally free coinage of both metals is considered as legal and allowed. But some times free coinage of only one metal is allowed. If it is so then the system is called limping standard.
4. There is a fixed legal ratio of exchange between the two metals e.g. if an American silver coin has 16 g. of silver for every gram of gold in gold coins, the ratio of exchange between the two would be 16:1. Any payment that would be made it would be made keeping in view the ratio between them.
Money is some thing, which has general acceptability in the settlement of debt, or in transfer of ownership of goods and services in a country. The value of exchange of every thing in a country is expressed in terms of money.
Mr. Robertson defines money in the following words
“Money is a commodity which is widely accepted in payment of goods or in discharge of other kinds of business obligation”.
An English economist Mr. Hawtrey observes that
“Money is one of those concepts which are definable primarily by the use or the purpose which they serve”.
In the words of Goh Cole,
“Money is purchasing power some thing that buys things”
According to Ely,
“Any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts”.
One of the simplest definitions of money is given by Mr. Walker who says that
“Money is what money does”.
In the light of the above definitions, it can be said that
“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.
Functions of Money
Money is said to perform the following functions
1. It serves as a medium of exchange.
2. It is used as a store of value.
3. It acts as an instrument of deferred payment.
4. It is a measure of value.
These are further discussed below
1. Medium of Exchange
The most general function of money is that it serves as a medium of exchange. The ownership in goods and services is exchanged through it. Money is accepted in exchange of goods and services and property rights simply because in its turn money can be exchanged for them at such places and times the possessor wishes. It means any thing can be brought and sold through it. Money acquires the capacity of serving as a medium of exchange also because of legal sanctions behind it and as such it is generally accepted in the settlements of debts or any financial transaction.
2. Measure of value
Money is used as a measure of value in the sense that the value of every thing is demanded in terms of money. As a measure of value money not only facilitates business transactions but is also useful transacting the sale and purchase if immovable properties buying at distant places. Money as a measure of value is also helpful in asserting the financial worth or stability of a business unit or an industrial concern which is possible from the study of their balance sheets containing the value of their assets and liabilities in terms of money. In simple words we can say that function of money as a measure of value helps us almost in every aspect of our daily life.
3. Store of Value
Another function of money is that it serves as a store of value. We can keep our assets in liquid form so that they can be used any time we feel of doing so. A unique feature of our daily life is that the flow of income does not correspond with the expenditure. The income in the majority of cases does not come to us with the same intervals as we have to make payments and consequently their adjustment would have been difficult but money, serving as a store of value makes a happy adjustment possible between the flow of income and expenditure intervals. Due to its value payments for the future can be made.
4. Instrument of Deferred Payment
Money also acts as an instrument of differed payment, which means that transactions requiring deferred payment are made possible through it. It so happens because the value of money having legal sanction behind, is more stable in comparison to other goods the value of which are liable to great fluctuation under the influence of their demand and supply position. The value of money being stable the parties in transaction are assured of getting the same value even after some time if the payments are made in terms of money. It means that money serving as an instrument of deferred payment facilitates credit transactions. Similarly for the same it encourages lending and borrowing which stimulate saving and investment and ultimately accelerates the economic growth of a country.
5. Transfer of Value
Money has simplified the process of transfer of value from one place to another with out losing its worth. Money is readily accepted by all without any difficulty. It is even possible to transfer a billion of rupees from one place to another.
Types of Money
Generally the classification of money is based on the material that is being used for the purpose. According to the material used, the money can be classified as:
1. Metallic Money
The currency in use or to be used when is made of some metal; it is known as metallic money. The metallic money usually consist of coins made up of gold, silver, copper, bronze etc. a characteristic of these coins is that they are properly shaped and stamped by the central issuing authority to prevent any misuse. In today’s modern age of business the coins are Marley used and issued. The metallic money is further classified as:
Classification of Metallic Money
Full Bodied Coin
Full bodied coin is the one, the face value of which is equal to the quantity of metal used in it. In this case the face value of the coins is equal to its intrinsic value.
Token Coins
A token coin or money is the one whose face value is higher than the value of the metal contained in it. It is usually as a subsidiary unit or coin. In token coin the face value is higher than the intrinsic value.
2. Paper Money
Paper currency refers to the currency notes issued or used in a country. These notes are made up of special kind of paper. Paper currency also includes notes (promissory) and cheques but they circulate as money only in the countries where they are used freely for settling business transactions such as U.S.A and U.K.
In early times when notes were introduced they were backed by an exactly equal amount in gold or silver kept by the issuing authority. Paper money is not wholly backed by some precious metal now. only a proportionate reserves are maintained and a good deal of the paper money rests on people’s of people’s confidence in the word of issuing authority generally the government or the central bank. Such a currency is also called fiduciary issue.
Value of Money
The value of money refers to the purchasing power of one unit of money in terms of goods and services. It indicates the quantity of goods and services that can be had in exchange of one unit of money. If the value of money is studied in relation to the home market, it is called internal value as against external value, which gives the value of money in terms of foreign currency.
Value of Money and Price Level
The price level of a country refers to the value of goods and services in terms of money. It means that value of money is expressed in terms of money. As for example, one unit of money supposes fetches 3 seers of wheat and value of 3 seers of wheat is one unit of money. Suppose the value of money rises and its one unit now fetches 5 seers of wheat. It means that the value of wheat has come down and now 5 seers of wheat will fetch one unit of money, which previously only did 3 seers.
From the above example it is evident that value of money is followed by the fall in price level and vice versa. In other words rise in price level makes the value of money fall and the same quantity of money can be had with more units of money. The above fact can also be interpreted as an increase in the quantity of money brings a corresponding fall in the value of money and the fluctuations in the value of money occurs due to a change in the quantity of money. This relationship between value of money and its quantity is explained by quantity theory of money.
Theory
The quantity of money states that other things remaining the same, the value of money falls in proportion to increase in the quantity of money in circulation. It mans that in the case, when the quantity of money increases by 25%, the value of money falls by 25%. Thus the quantity of money and its value of money are inversely related.
Explanation
The value of money like any other commodity is determined by its demand and supply. Thus the quantity theory of money can be explained under these two heads.
1. As Regards Demand of Money
Demand of money according to Fisher is the derived demand i.e. not for direct consumption. Money being a medium of exchange is demanded for the purchasing of goods and services. Demand for money therefore depends upon the demand for goods and services.
2. As Regards Supply of Money
According to Fisher supply of money is represented by the total expenditure made by the people calculated during a given period of time. The total expenditure made by the people is calculated by multiplying the total quantity of legal tender money by its velocity plus the bank money (cheque, drafts etc) multiplied by its velocity. Velocity of money means the number of hands that one unit of money changes during a given period of time. For example a RS 100 note changes 10 hands in a year, its velocity will therefore be 10. It means that total payment made by this note will be .
RS. 100 * 10 = RS. 1000
According to Fisher, supply of money is determined by the following equation.
MV + M‘V’
M represents the actual money and M’ the bank money where as V and V’ represent their respective velocities.
Demand for money is represented by price multiplied by turnover i.e. total quantity of goods and services sold and therefore demand is determined as:
Demand of money = P x T
Where P is the price and T is the turnover.
Since the value of money is determined at a point where its demand is equal to supply and accordingly Fisher gives the following equation of exchange:
PT = M‘V’ + MV
Or
P = (M‘V’ + MV)/T
According to the above definition / equation, the price level is determined by dividing the total supply of money by turnover.
Criticism
The quantity theory of money is theoretically convincing but practically it is consider as a misleading one.
1. The very assumption in the theory that other things remaining same are incorrect. Fisher assumed money as independent variable where as credit (M’) is a function of business activity i.e. the turnover. It means the turnover increases, the supply of bank or credit also increases and consequently money is not an independent variable.
2. Velocity of money and bank money has been assumed is assumed in this theory to be constant where as they are not so because they depend upon business activity which is never constant.
3. The theory fails to explain as to why during depression the increase in supply of money does not bring a corresponding increase in the price level.
4. According to quantity theory high price is the effect of increase in supply of money which is not always true. Scarcity of goods caused by a fall in production or increase in production with respect to an increase in population also raises the price level.
5. It is argued that Fisher’s equation is only valid in a static economy. The economy becomes static beyond full employment level because the physical production does not increase in such a situation. the extra money if introduced in such a stage of economy is not absorbed by increased quantity of output and consequently the price level is directly affected. This shows that Fisher equation in a dynamic economy is of no use.
Importance of Money
In order to have a comprehensive idea of the importance of money, we can classify it as.
1. Importance to individuals in their daily life.
2. Importance to an economy.
1. Importance to Individuals in their Daily Life
Importance to individuals in their daily life is well established under the following heads
i. Removal of Double Coincidence
Money has removed the problems of double coincidence of wants. An individual because of money is in position to exercise his choice and can purchase or consume a commodity according to their liking.
ii. Convenience in Buying and Selling
Money being a measure of value, an individual can sell his goods for money and purchase the goods he needs through it. The sale and purchase of goods is not confined to with in the borders of a country only, but are also conducted abroad.
iii. Ease in Planning
Money has given an opportunity to an individual to plan his consumption in a way that he gets the maximum satisfaction out of his limited income. Because of money price of every thing is known to him on the basis of which he can ascertain that what he can afford and what he cannot.
iv. An Option for Saving
Money being a store of value helps the individual to make provision for rainy days. During the period of his earning, he may have some thing, which he can use in his old age when his earning has reduced.
v. Recovery Options
Money also helps an individual to cover the gap between income and expenditure intervals, which is done either by withdrawing the past saving or by borrowing. Saving and borrowing have become common and a part of our economic activities.
vi. Possibilities of Specialization
Money has made possible the regional specialization of production on the basis of the most favorable condition principle, which has given birth to international division of labour have reduced the cost, improved the quality and increased the verities of products. Individuals are in a position to consume superior goods at a cheaper price.
vii. Transfer of Value
Money being a measure of value helps the individuals to transfer the value of their fixed assets from one places to another in the country or out side the country. In other words even the immoveable assets have become mobile.
viii. A Source of Income
Because of lending and borrowing practices facilitated by money, the individuals saving become a source of income. The individuals make savings, invest them in productive activities and receive a regular income, which increases their welfare by improving their standard of living.
2. Importance to Economy
The economy of a country is however, benefited by money in more than one-way:
i. Enhancing Exchange Facility
Money enhances the exchange facility and extends the market for goods and services produced in the economy. The extension of market creates demand for goods and services and consequently the resources are fully exploited to increase the output so that the inc4reased demand may be adequately met.
ii. Economies of scale
Money oriented demand provides economics of scale. The economy in such a situation produces goods at a cheaper cost because of the reason that input and output ratio rises.
iii. Increased Opportunities of Employment
Increased volume of production increases the level of employment and income level follows suit. Raised income level stimulates saving and investment and consequently the investment rate in the economy rises.
iv. Facilitate International Trade
Through money international trade is facilitated, which makes the resources of an economy more mobile and such resources are exploited to the maximum extent.
v. Introduction of Lending and Borrowing
Because of money lending and borrowing have become a common practice among the nations of the world. The surplus resources o fan economy moves to another economy, which is deficient in such resources. Flow of resources helps an undeveloped to venture into her development plan. Lending and borrowing practices developed through money, exchange saving and stimulate investment n the economy. As a result the economic growth is accelerated.
Dangers of Money
Money has proved dangers in several ways
1. Economic Instability
Some economists of the view that money is responsible for economic instability. When there was no money, saving was not divorced from investment. Those who saved also invested. But in a monetised economy, saving is done by certain people and investment by some other people. Hence, it does not follow that saving and investment should be equal. When savings in a community exceeds investments, then national income output and employment decrease and the economy is engulfed in depression.
2. Danger of Over-Issue
The main danger of money lies in its liability of being aver issued. The over issue of money may result in inflation. Excessive rise in prices hits hard the consuming public. It endangers speculation and inhibits productive enterprises. It adversely effect distribution of income and wealth in the community so that the gulf between the rich and poor widens.
3. Economic Inequalities
Money has proved to be a very continent tool for amassing wealth and exploitation of the poor by the rich. The misery and degradation has gone to a great extant after the existence of money.
4. Moral Depravity
Money has weakened the moral fiber of the man. The social evil like corruption has proved to be a soul-killing weapon. As said by an eminent German economist Von Mises
“Money is regarded as the cause of theft and murder”.
Money is itself is not bad, but its possession or debt facilitates corruption and crime.
Gresham's Law
Concept
Gresham’s law can be stated, as
“Bad money tends to drive good money out of circulation when both of them are full legal tender”.
Thus when two kinds of money good and bad circulate together, other things remaining constant, bad money will remain in circulation and good money will go out of circulation.
Classification of Good and Bad Money
Good and bad money may be classified as:
1. Good money is full valued coins of standard wealth and fineness while bad money is the one, which is debased or worn out.
2. Good money may be superior money of higher substance while bad money will be inferior money of less intrinsic value.
Explanation
In the light of the first classification the law may be stated as:
“Whenever legal tender coins of the same face value but of different weight or degree of fineness are in continuous circulation, the light weight or bad coins tend to drive out the full weight fine coins out of circulation”.
Marshal states the law in the light of second classification as:
“ Money which is inferior in respect to exchange or substance value, commonly shows greater tendency in circulation than those which are superior in this respect”.
Application
The law is applicable in three cases:
Under Mono – Metallism
When coins of same metal but of varying weight or fineness or both circulate together at the same face value, it will be the human tendency to keep a brand new coin and give out the depreciated one. Thus the old and worn out coins will tend to drive newly minted full weight fine coins out of circulation.
Under Bi – Metallism
When gold and silver coins are freely circulated as legal tender, then the over valued coin will drive the under value coin out of the game.
Under Paper Currency
When paper money and metallic money circulate together as standard, however paper money being inferior tends to drive metallic money out of circulation.
The reasons for this are:
Good money is exported to earn profits.
Good money is hoarded for later adjustments.
Good coins are melted and sold as bullion.
Exceptions
The law does not operate when:
There is a shortage of currency.
When there is strong public opinion against bad money.
Bi Metallism
Definition
Bimetallism is a system of currency under which the price of the monitory unit is regulated with reference to any two metals (generally gold and silver). Both the metals act as a medium of exchange and the standard of value. The two metals remain in circulation side by side. The ratio between their values is fixed and maintained by the currency issuing authority.
Essential Features
The essential features of bimetallism are:
1. Standard coins of two metals, generally gold and silver remain in circulation side by side.
2. Coins of each of the metals remain unlimited legal tender.
3. Generally free coinage of both metals is considered as legal and allowed. But some times free coinage of only one metal is allowed. If it is so then the system is called limping standard.
4. There is a fixed legal ratio of exchange between the two metals e.g. if an American silver coin has 16 g. of silver for every gram of gold in gold coins, the ratio of exchange between the two would be 16:1. Any payment that would be made it would be made keeping in view the ratio between them.
Priniciple of Economics XI - Trade Unions
Trade Union
Modern industrialization has given rise to a great number of problems. As a result there has been a clash between the interests of labour and organization, the former claming high wages and latter high profits. Today labour has come to realize that they can improve their conditions of work only through collective bargaining with the employers. In the words of Sydney and Webb
“A trade union is a continuous association of wage earners for improving the conditions of their working lives”.
Functions of Trade Unions
Trade unions perform a number of functions. Some of them are classified in these main groups viz:
1. Militant Function
2. Fraternal Functions
3. Political Functions
1. Militant Function
The main function of a trade union is to fight for the basic rights and interests of its members. In doing this they offer the following benefits to the labour.
Job Security
For achieving this objective seniority rights of the workers, control over hiring of labour, grievance procedure for handling cases of discharge etc is used as devices.
Improving Conditions of Work
Trade unions put a pressure on the employers to provide workers with better conditions of work, sufficient recreation facilities, standardized hours of work etc.
Limitation of Output
If a given number of labours produce more than what they ought to be employed for, trade unions make sure for a standardization plan. Hence the output per worker is standardized.
2. Fraternal Function
Fraternal function consists of mutual help for the welfare of the workers. Under this content the trade unions perform the following functions.
Professional Training
Trade unions arrange for education and professional training opportunities training opportunities for their workers and also assist them in improving their efficiency and skill.
Source of Information
Trade unions serve as a source of information for the workers. The workers are guided and advised by the trade unions. Their leaders defuse information by organizing meetings of the workers.
Insurance Facilities
The trade unions also arrange for insurance facilities against risks, accidents etc. they make the workmen compensation act followed in this regard.
3. Political Functions
Many trade unions fight elections to the rights. In many countries strong; labour parties have grown up and in England especially there has been the government in the hands of labour party many times. The trade unions influence the labour party of the government and often clench some labour seats in the legislature.
Importance of Labour Unions
Trade unions are of great significance for an economy because of the reason that they create congenial relation between the workers and the management and help a lot in developing mutual understanding among them. This brings industrial peace, which becomes an effective stimulation for the growth and expansion of industries in a country.
Trade unions help the employers by extending cooperation in settlement of labour disputes. In the absence of trade unions it becomes difficult if it is not possible for the employers to contract the individual workers and find out their views on certain issues related to the disputes. Trade unions also assist the employers in labour administration and control. The efficiency of workers is also improved through trade unions and as such, the employers are benefited.
Modern industrialization has given rise to a great number of problems. As a result there has been a clash between the interests of labour and organization, the former claming high wages and latter high profits. Today labour has come to realize that they can improve their conditions of work only through collective bargaining with the employers. In the words of Sydney and Webb
“A trade union is a continuous association of wage earners for improving the conditions of their working lives”.
Functions of Trade Unions
Trade unions perform a number of functions. Some of them are classified in these main groups viz:
1. Militant Function
2. Fraternal Functions
3. Political Functions
1. Militant Function
The main function of a trade union is to fight for the basic rights and interests of its members. In doing this they offer the following benefits to the labour.
Job Security
For achieving this objective seniority rights of the workers, control over hiring of labour, grievance procedure for handling cases of discharge etc is used as devices.
Improving Conditions of Work
Trade unions put a pressure on the employers to provide workers with better conditions of work, sufficient recreation facilities, standardized hours of work etc.
Limitation of Output
If a given number of labours produce more than what they ought to be employed for, trade unions make sure for a standardization plan. Hence the output per worker is standardized.
2. Fraternal Function
Fraternal function consists of mutual help for the welfare of the workers. Under this content the trade unions perform the following functions.
Professional Training
Trade unions arrange for education and professional training opportunities training opportunities for their workers and also assist them in improving their efficiency and skill.
Source of Information
Trade unions serve as a source of information for the workers. The workers are guided and advised by the trade unions. Their leaders defuse information by organizing meetings of the workers.
Insurance Facilities
The trade unions also arrange for insurance facilities against risks, accidents etc. they make the workmen compensation act followed in this regard.
3. Political Functions
Many trade unions fight elections to the rights. In many countries strong; labour parties have grown up and in England especially there has been the government in the hands of labour party many times. The trade unions influence the labour party of the government and often clench some labour seats in the legislature.
Importance of Labour Unions
Trade unions are of great significance for an economy because of the reason that they create congenial relation between the workers and the management and help a lot in developing mutual understanding among them. This brings industrial peace, which becomes an effective stimulation for the growth and expansion of industries in a country.
Trade unions help the employers by extending cooperation in settlement of labour disputes. In the absence of trade unions it becomes difficult if it is not possible for the employers to contract the individual workers and find out their views on certain issues related to the disputes. Trade unions also assist the employers in labour administration and control. The efficiency of workers is also improved through trade unions and as such, the employers are benefited.
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