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Money and near money ( money and banking)

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Functions Of Money
Functions Of Money
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Money and near money ( money and banking)

  1. 1. MONEY AND NEAR MONEY By: Vidhi(514) and Muskan(581)
  2. 2.  Crowther defines money as “anything that is generally acceptable as a means of exchange and at the same time acts as a measure and store of value”. DEFINITION OF MONEY
  3. 3. TYPES OF MONEY 1. METALLIC MONEY 2.PAPER MONEY 3.CREDIT MONEY  money made up of metal.  Eg : Gold, Silver, Copper. Types : 1. Standard money 2.Token money  Money made up of paper.  consist of currency note issued by govt. or the central bank of the country. Types: 1. Representative money 2.Convertible money 3.Inconvertible money 4.Fiat money It refers to a future monetary claim against an individual . Forms: 1.Bonds 2.Money market Eg: bank deposits,credit card loans.
  4. 4. NEAR MONEY Near money refers to all those assets which posses many of the characteristics of money, have high degree of liquidity and can inexpensively be converted into money . There are assets which cannot be technically regarded as money and perform some functions of money . Near money cannot be directly used for making transactions. They must be converted into money proper before spending. Near money assets are highly liquid but are not as liquid as the money is. Some examples of near money are bills of exchange, bonds, debentures, shares etc.
  5. 5. ‘Nearness’ of near-money depends on the degree of liquidity of the near money assets. Liquidity refers to the ease with which an asset ,or security , can be converted into ready cash without affecting its market price on short notice and with minimum cost. Cash is the most liquid of assets like tangible items unless liquid. Greater the liquidity, more near an asset is to money and vice versa. Overall liquidity of an economy depends upon the composition of the total stock because different assets carry different degrees of liquidity. For example, (A) coins,currency notes and demand deposits represent first grade liquidity ; (B) time deposits, treasury bills, Govt securities, saving loans etc. represent second grade liquidity ; (C) other assets like deposits of building socities,financial claims of hire purchase companies etc. represent third grade liquidity.
  6. 6. ESTIMATION OF DEGREE OF LIQUIDITY OF ASSETS ESTIMATION OF DEGREE OF LIQUIDITY OF ASSETS >The given figure shows the distinction between money and near money in terms of interest earnings of an asset. >An asset which earns interest rate is not money and thus is near money and vice –versa. >The degree of liquidity of an asset can be known by the difference between marker rate of interest (MR) and the actual rate of interest (AR). >Given the (MR), the higher the (AR),the lower is the degree of moneyness of an asset and vice-versa. > Figure 1 and table 1 exhibit this relationship between the (AR) and the degree of liquidity.
  7. 7. MR (%) AR(%) DEGREE OF MONEYNESS 10 0 Full bodied money (100% liquidity) 10 2 Highest (80% liquidity) 10 4 Moderate (40% liquidity) 10 8 Lowest (20% liquidity) 10 10 No moneyness ( zero liquidity) Market rate of interest (MR) being given (10%) there can be different rates of interest earned by different assets such as 2%,4% and 8%. The degree of moneyness is the highest (OM1 or 80%) in the asset which bears the lowest rate of interest (AR=2%) ; and degree of moneyness is the lowest ( OM3 or 20%) in the asset which bears the highest rate of interest. An asset earning AR=4% as moderate degree of liquidity. If an asset bear 0 rate of interest it is a full bodied money with 100% liquidity. IF THE RATE OF INTEREST IS EQUAL TO THE MARKET RATE OF INTEREST AR=MR=100% THE DEGREE OF LIQUIDITY OF THE ASSET BECOMES ZERO
  8. 8. 1. BILLS OF EXCHANGE : It is a promise to pay a specified sum of money on a specified date generally after three months or ninety days. It may be treasury bill or commercial bills or financial bills. A. Commercial bill – Drawn in connection with the commercial transactions. B. Treasury bill – Are the finance bills through which the government raises short period funds. C. Finance bill – Drawn when a person lends money to other person TYPES OF NEAR MONEY
  9. 9. 2. BONDS: An instrument of borrowing for relatively long periods . It is a promise to pay a fixed sum of money by way of interest annualy for a specified number of years and to repay the capital sum at the end of the period. This method of borrowing is adopted by the government and the industrial units. Bonds issued by the firms are known as debentures . Bonds issued by the government without a maturity date with interest payable for the indefinite period are called irredeemable bonds or consols or perpetuties .
  10. 10. 3.EQUITY SHARES : Equity shares offer their owners a claim to a share in the profits of the firm declared as dividend. They are marketable in the stock exchange. Bonds and debentures also are transacted in the stock exchange, but the bills of exchange operate in the money market.
  11. 11. 4. OTHER NEAR MONEY ASSETS : Besides bill of exchange , bonds,equity shares there are a large number of financial assets which can be considered as near money . They are time deposits and saving deposits with commercial bank ; banker’s acceptances ;cash surrender values of line insurance policies ; repurchasable shares in savings and loan associations ; deposits of building societies ; traveller’s cheque ; postal saving deposits ; saving in units of unit trust etc.
  12. 12. DISTINCTION BETWEEN MONEY AND NEAR MONEY BASIS MONEY NEAR MONEY 1. DEFINATION It consists of coins,currency notes and demand deposits of the banks. It includes the financial assets , like time deposits, bills of exchange , bonds , shares etc. 2.LIQUIDITY It possesses 100% liquidity i.e it is perfectly liquid or can be readily acceptable as a means of payment . It lacks 100% liquidity i.e it involves time cost for its conversion into money 3.FUNCTION It serves as a unit of account for a common measure of value. All prices are expressed in terms of money It does not perform such function rather , its own value is expressed in terms of money. 4. USE IN TRANSACTIONS It is directly used for making transactions. It is an indirect medium of exchange . 5. INCOME YIELDING QUALITY It is not an income yielding asset They are income yeilding assets.
  13. 13. SIMILARITIES BETWEEN MONEY AND NEAR-MONEY (1) • Both money and near money are claims. Coins and currency are a claim over the govt. and central bank. Bank money is a claim over the bank in which deposits are held. Near money assets are claim over their respective parties or institutions. (2) • Money is not qualitatively different from near-money. Liquidity is the common attribute of both money and near-money . They differ only in terms of degree of liquidity. (3) • Both money and near-money act as a store of value . But, near-money assets are preferred because they yield income along with being a store of value.
  14. 14. 1.BROADER DEFINITION OF MONEY: The modern concept of money is based on the liquidity approach, as compared to the traditional approach depending upon the transactions approach. In the transactions approach money includes only legal tender money and bank money whereas in the liquidity approach it includes (a) legal tender money (b) bank money (c) near money i.e , all those financial assets which can be easily and inexpensively convert it into money proper within a short period of time. 2. INCREASE IN VELOCITY OF MONEY : Near- money influences the velocity of money . A person’s ability to spend depends not only on the amount of money he has with him and he holds in the bank ( legal money and bank money) , but also on his ability to raise additional funds by selling his near- money assets . The existence of near money increases the velocity of money (V) and hence aggregate demand (MV) in the economy by activating idle demand deposits and currency. SIGNIFICANCE OF NEAR- MONEY
  15. 15. 3. POLICY IMPLICATIONS : Near-money has important policy implications for the monetary authorities. The prevalence of near-money assets significantly increases the overall level of liquidity and hence the level of aggregate expenditure . The monetary authority which aims at influencing the level of aggregate expenditure by controlling the money supply alone will fail to achieve its objective. For the monetary policy to be effective, it must influence not only the total stock of money in the economy, but also the total stock of near-money assets. SIGNIFICANCE OF NEAR-MONEY Broader definition of money Increase in Velocity of Money Policy implication
  16. 16. QUALITIES OF GOOD MONEY MATERIAL General acceptabili ty portability Durabilit y Divisibilit y homogeneit y Cognisabilit y Stability Mallea bility
  17. 17. 1.GENERAL ACCEPTABILITY: The material of which money is made should be acceptable to all without any hesitation. Gold and silver are considered as good money material because they are readily acceptable to the general public. 2. PORTABILITY: Money should be easily carried or transferred from one place to another . Money material must have large value in small bulk. 3. DURABILITY: Money material must last for a long time without losing its value . 4. HOMOGENEITY : Money should be homogeneous . Its units should be identical ; they should be of equal quality and physically indistinguishible. 5.COGNISABILITY : Money should be easily recognised . 6.STABILITY: The value of money should remain stable and should not change for a long period of time . 7. DIVISIBILITY: Money material must be easily sub-divided to allow for the purchase of smaller units of the commodities. 8. MALLEABILITY: The money material should be capable of being melted and put to different forms.
  18. 18.  Monetary economy refers to the economic system in which money is used as a medium of exchange . It is a monetarised economy in which goods are exchanged indirectly through money ; money purchases goods and goods purchase money. It is the opposite of barter economy where no money is employed and the exchange takes place directly between goods and goods. In short, the use of money converts a barter economy into a monetary economy. MONETARY ECONOMY
  19. 19. FEATURES OF MONETARY ECONOMY 1.USE OF MONEY Monetary economy employes money to perform the following function: a. Money is generally accepted as a medium of exchange . b. All payments are made in terms of money. c. It serves as a unit of account or a numeric or a measure of value d. It functions as a standard of deferred payments. e. It facilitates the transfer of value from one place to another. 2.MONEY AS AN ASSET In a monetary economy individuals also use money as an asset . Like other assets wealth can be stored in the form of money . It is considered as an asset because it is the permanent abode of purchasing power i.e it is a claim against all goods and services which an individual desires to have .
  20. 20. 3. GREATER LIQUIDITY 4.EXISTENCE OF FINANCIAL INSTITUTIONS Monetary economy has greater liquidity than the barter economy has. Money is the most liquid asset and is used as a link between the present and the future in a monetary economy . Such a link is absent in the barter system. Financial institutions such a central bank, commercial banks and other financial institutions exist in monetary economy unlike in barter system. These institutions deal with a variety of non-cash financial assets or near- money assets..Thus, in monetary economy, besides money a number of near-money assets are also created and widely used.
  21. 21. 5.EFFICIENT EXCHANGE SYSTEM 6.MARKET MECHANISM As compared to the barter system exchange activities are performed more efficiently and more conveniently in a monetary economy. All the difficulties and inconveniences of barter system , such as the problem of double coincidence of wants , divisibility , storing wealth, common measure , deferred payments, transportation etc. are eliminated in a monetary economy. As against barter system , market mechanism operates in a market economy because of the use of money. In market mechanism, the forces of demand and supply interact with prices. Prices, which indicates the relative importance of various goods and services are expressed in terms of money.Thus the use of money is essential for a working market mechanism.
  22. 22. 7.INTERACTION B/W MONETARY AND REAL FACTORS 8.STAGE OF ECONOMIC DEVELOPMENT As opposed to the barter economy, there is circular flow of money corresponding to the circular flow of real transactions in a monetary economy. In the circular flow of real transactions, factor services flow from household to the firm and goods and services flow from firms to households. In the circular flow of money , money flows from firms to households and from households to the firms. Monetary economy is relatively advanced economy as compared to the barter economy. In the barter economy, economic activities (production and trade) are at a low and subsistence level and there is economic backwardness. Where as, in the monetary economy because of the extensive use of money, division of labour takes place , technology develops, production increases, trade expands and there is economic development.
  23. 23. THANK YOU !!

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