Value Of Money | Important Of Money
The value of a commodity is what is that commodity can command in exchange. Thus value of a bunch of plantains may be a kilogram of meat. When we are dealing with tangible assets it is easy to determine their relative values. Money could be used to determine the value of a commodity. Thus, price charge for goods and service are their relative values expressed in monetary terms.
The value of money cannot be seen in itself. Its value can be seen only through what happens to the prices charged on goods and services in the market. If in a given period, N5000 was sufficient for weekly purchases and now cannot command the same amount of goods, we can say its value has fallen, that is, it cannot buy the same quantity of goods and services as in the given year. If on the other hand it buys more goods than it did previously, its values will be said to have risen.
As indicated above the value of money is affected by the price level and by the quantity of money in circulation in the country. If the quantity of money in circulation far out numbers the quantity of the available goods and services, the value of money will fall, given rise to an inflationary situation.
The Important of Money (Value Of Money)
Here are some of the list of money that may interest your interest;
- Money encourages large scale production in an economy. Being a good medium of exchange, it facilities and allows for specialization to be carried out to the fullest extent.
- Money encourages the growth of commercial transactions in the society. By performing its function as a standard for deferred payment money helps businessman to conduct business now with the view of getting payments in the future.
- It encourages saving which can be used commercial banks to generate credit for prospective investors or to lend to the government for self liquidating projects like market stalls erections.
- It services in short, have removed all the inconveniencies which its lacks caused in the primitive economies and to an extent have increased the prosperity of mankind.
The Supply Of Money
By the supply of money we mean the total quality of money in the economy. In the market economy, the following constitute the common types of money in the economy; (i) Coins, (ii) Bank notes and (iii) Bank deposit
In addition to the above forms of money, there are other instruments, which may influence the quantity of money in circulation. If money is what money does, then instruments which are near money, also affects the supply of money. These instruments are usually called “near money”. They are not money because they are not completely conferred with liquidity.
Creditor cannot be legally forced to accept them in payment. Such instruments include cheques, no negotiable Bills of Exchange, trade stamps, postal order and money orders.
The Demand For Money
By the expression the demand for money we mean the desire by the people to hold cash as opposed to investing it in the purchase of shares stocks and bonds. Why do people prefer to hold their money in a liquid form. There are three main reason for such a desire.
- The transaction motive – This relates to the need for cash for current personal and business exchange. Most people hold cash because the time they receive salary and the next time they expect to get paid are far apart. When the interview between receiving incomes is small, few people hold a lot of cash if their expenditure is fairly stable. The ability of people to hold cash in further influence by the general level of business turnover, the period between incurring expenditure and the receipt to income, the amount received as wages and the possibility of getting a loan.
- Precautionary motive – People hold cash to be able to meet unforeseen contingence. Many individuals hold cash to provide for illness, accidents and sudden lay offs from work. Many businessmen hold cash to meet unexpected changes in the business trend. The precautionary demand for money is dependent on the level of income, the trend of business, the charges paid for holding liquid assets as bank deposits, the supply of cash in the economy and the possibility of making windfall profits from unforeseen business deals.
- The speculative motive – Having kept sufficient funds to meet the transactive and precautionary motives, many individuals and businessmen hold cash to grant loans or buy debentures and government bonds. When bond prices rise people will buy more bonds since interest rates will fall. They will sell bonds as soon as the interest start falling. In order words, high interest induces people to hold more money as interest raises, hoping that when it falls they will buy bonds. The speculative motive is influenced by the rate of interest.