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Q: What is the role of money? Robertson in his book Principles of Money' states "Money enables man as consumer to generalize his purchasing power and make his claims on society in the form which suits him most." The modem economists fully recognize the economic role of money as a medium of exchange and standard of value. They regard it as an economic catalyst. Role of money in economy can be categorized in different ways: Static Role of money In static role of money, the importance of money lies in removing the difficulties of barter e.g. serving as medium of exchange Acting as unit of account and store of value Dynamic Role of money In dynamic role, money plays an important role in daily life of every citizen whether he is consumer, a producer, a businessman, a politician and administrator etc. Role of money in capitalist economy They emphasize that in a capitalistic economy, money exercises a decisive influence on the volume of production, distribution of wealth and income, direction and volume of exchange and on the rate of saving and investment in the country. Role of Money in a Capitalistic Economy: “Money is the sovereign queen of all delights. For her the teacher teaches, the lawyer pleads, the dancer dances, the soldier fights.” Anam Rauf (GCUF) Page 1

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Page 1: Role of Money

Q: What is the role of money?Robertson in his book Principles of Money' states

"Money enables man as consumer to generalize his purchasing power and make his claims on

society in the form which suits him most."

The modem economists fully recognize the economic role of money as a medium of exchange

and standard of value. They regard it as an economic catalyst.

Role of money in economy can be categorized in different ways:

Static Role of money

In static role of money, the importance of money lies in removing the difficulties of barter e.g.

serving as medium of exchange

Acting as unit of account and store of value

Dynamic Role of money

In dynamic role, money plays an important role in daily life of every citizen whether he is

consumer, a producer, a businessman, a politician and administrator etc.

Role of money in capitalist economy

They emphasize that in a capitalistic economy, money exercises a decisive influence on the

volume of production, distribution of wealth and income, direction and volume of exchange and

on the rate of saving and investment in the country.

Role of Money in a Capitalistic Economy:

“Money is the sovereign queen of all delights. For her the teacher teaches, the lawyer pleads,

the dancer dances, the soldier fights.”

In a capitalistic economy, money is revolving around in which all economic activities come

together. Money is an indicator as well as a surveyor of wealth.

The importance of money can be judged from the powerful influence which it exercises on the

(1) Volume of production;

(2) Direction of production;

(3) Pattern of consumption;

(4) Method of distribution

(5) Direction and volume of exchange; and

(6) Rate of saving and mi investment in the country.

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Production Decisions

Production has been greatly facilitated by the introduction of

money. Money makes possible the accumulation of wealth in those hands which are

Able to organize the production- The captain of the industry hires the various factors '

of production in order to meet the future demand for goods and services and pays them in

terms of money If the reward was to be paid in commodity, then the exchange of goods

would have been very limited and only done on a small scale production.

Production without the use of money cannot be organized on a large scale and run

efficiently and economically.

The decision of what, where, when and how much to produce are all guided by the

amount of money offered in exchange of goods and service.

The cost of production is also estimated in terms of money.

The profit or loss which is the difference between the sales proceeds and the total money

cost is also expressed in terms of money.

With the introduction of money, the consumption can be easily postponed and the assets

can be stored for use to a future date.

Exchange Transactions

In a moneyless economy, exchange of goods was a very inconvenient process. People used to

face the difficulties of double coincidence of wants. There was also no common measure of

value. The use of money has successfully removed the awkwardness of barter.

Money, by acting as a medium of exchange, has greatly stimulated the exchange of goods.

Distribution of National Dividend

The four factors of production, combining together, produce a net aggregate of commodities

every year. The share of each factor of production i.e., rent of land, wages of labor, interest on

capital and profit to entrepreneur is paid in terms of money,

If the share of each factor of production was to be paid by dividing joint products, it would have

caused much inconvenience to each distributor.

As money is generally acceptable as a medium of "exchange and at the same time acts as a

measure and a store of value, therefore, the distribution of national dividend through the medium

of money greatly facilitates the processes of distribution.

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In the words of Jevon: "Money subdivides and distributes properly and lubricates the activities

of exchange”.

Money in the Field of Public Finance

Money renders a very valuable service in the field of public finance.. Money helps the state in

the achievement of these objectives. The government can easily raise revenue through the

medium of money and can spend it for the betterment of the people.

Money in the Sphere of Banking

As, money serves as standard of deferred payments. The general confidence in the purchasing

power of money makes it the chief farm of credit. The debtor can safely borrow money for

consumption or for production purposes. This has led to the building up of a gigantic

superstructure of banking and credit system.

Attainment of High Level of Production and Employment

The introduction of money in the economy has facilitated exchange. It has led to high degree of

specialization and interdependence of economic units; If the money is properly managed, it

ensures rising level of productions employment and real income in the Country.

Role of money in socialist economy are as follow:

Capital Accumulation

Besides, capital accumulation is possible through money. It is money that provides liquidity and

mobility required for capital accumulation. In a socialist economy the sources of investment

funds are basically the same as under a capitalist economy.

Foreign Trade

Moreover, socialist economies do not enter into foreign trade on bilateral trade relations based on

commodity transactions. Rather, being members of the World Bank and the IMF, they make

payments in monetary terms in their international trade relations.

Circular Flow of Money

There is also circular flow of money exist in a economy. The producing units receive funds for

investment from the state budget as grants or as loans from the state bank to purchase the

necessary inputs and for making payments to workers.

Basis of Capitalist Production

In fact, money is the very basis of the capitalist production. By facilitating the purchase of

inputs, and by increasing specialization and division of labor, money helps in the growth of

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research in the agricultural, industrial and tertiary sectors of a capitalist economy. Since all these

sectors are mutually dependent and are based on mutual exchanges through money.

Basis of Credit

The entire system of production is based on credit. Credit instruments are a form of money

which is issued by banks to facilitate trade, commerce, agriculture, industry, transport, etc. under

capitalism. It is on the basis of credit instruments that banks advance loans to the different

sectors of a economy.

Means of Capital Formation

The growth of a economy depends upon the capital accumulation. And capital accumulation is a

process whereby people save out of their money incomes deposit them with banks and other

financial institutions which, in turn, lend them to agriculturists, industrialists, transporters and

other businessmen for investment in capital assets. The different stages in the process of capital

formation under capitalism—receiving income, saving and investing—are all performed in

money terms.

Link between the Present and the Future

Money establishes a link between the present and future through the freedom of enterprise and

freedom of consumption under economy. The freedom of consumption the part of the consumer

leads to freedom to save a part of his money income. Saving leads to the production of capital

goods via investment and capital goods contribute to the growth of the economy.

This is possible through money when the goods are stored n the present and sold in the future. It

is in this way that money helps to establish a link between the present and the future.

Leads to Business Cycles

Besides these apparent merits of money in a capitalist economy, it has one serious defect in that

an excess of money leads to inflation and its shortage leads to deflation. These changes in the

quantity of money result in cyclical fluctuations with their attendant consequences on the

economy. In fact, an excess of money supply creates more demand which, in turn, leads to

overproduction, to glut of commodities in the market and finally to depression and mass

unemployment.

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