Money is an economic unit.
Money is recognized as a medium of exchange for monetary transactions in an economy.
Money has a physical property and market participants have adopted it as a medium of exchange.
Each government of the country has its own money.
Money is the most liquid asset used in the settlement of present and future financial transactions.
It has value in its country and has international value through foreign exchange.
In economics, there are three types of money.
They are commodity money, fiat money and bank money.
Commodity money is a goods, which has equal value to real money.
The gold coin is commodity money.
Fiat money is a goods, which is issued by the central government.
Dollar, Euro, Rs are the example of fiat money.
Bank money is a credit balance at the bank.
This money can be withdrawn by issuing a cheque, by internet banking or plastic ATM and Debit card.
Keep in Mind
Money is the most liquidity asset used for the transaction of goods and services. In the early stages of civilization, different people used different commodities as money. They were cattle, tobacco, shells, wheat, tea, salt, knives, leather etc. They also used to animals such as sheep, horses and oxen etc as money. Later, metals like copper, iron and lead, tin had been used as money. Gradually, precious metals such as gold and silver replaced other metals as money. Nowadays, paper money and metallic money (coins) are in use. Moreover credit instruments like cheque, credit cards are also used as money. The next generation money is cryptocurrency or digital money. |
According to Walker, “Money is that money does.”
According to Marshal, “Money is the pivot around which economic science clusters.”
Keynes has defined money, “Money is that by the delivery of which debt-contracts and price contracts are discharged in the shape of which a store of general purchasing power is held.”
According to Nepal Rastra Bank, “Money means all types of currency notes, postal orders, postal notes, money orders, cheques, drafts, traveller’s cheques, letters of credit, bills of exchange, promissory notes and credit cards.”
Keep in mind (KIM)
Different terms for money: |
Cash: currency, ready money, ready cash, change, coins, coinage, dosh (UK slang), greenbacks (US slang), bucks (US informal) |
Wealth: capital, funds, income, earnings, means, wages, stock, equities, assets, big bucks (US slang) |
Paper money are notes and cheques, |
Plastic money are debit card, credit card, smart card etc. |
Online money through Bank App |
Online money payments in Nepal are eSewa, Khatli, Connect IPS, iPay etc. |
Online money payments in Pakistan are EasyPaisa, JazzCash, Upaisa, GoLootLO, PayPak etc. |
Online money payments in India are Paytm, BHIM, InstaMojo, PayU India, Citrus Pay, CCAvenue, EBS Payment Gateway etc. |
Online money payments in international like Western Union, PayPal, MasterCard etc. |
Cryptocurrency or virtual moneys are Bitcoin, Litecoin, Ethereum, Zcash, Dash, Ripple, Monero etc. |
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The major importance of money are explained below:
Importance to consumers
Money has the most impotence to the consumers.
Retail consumers are mostly depending on money.
Money gives them ready command over goods and services with an additional facility of its being divisible into smaller units.
It enables them to distribute their limited income on different goods and services so that they can get maximum satisfaction.
Further, it has made the best use of scarce resources possible.
Thus, money provides freedom of choice of consumption.
Importance to producers
Money has importance to producers.
Producers and businessmen plan for production.
Production needs money for different purposes like the cost of materials, production expenses, administrative expenses and selling expenses.
Money is also paid for various types of advance payments.
Similarly, money has facilitated borrowing and lending.
Importance in exchange
Money is the medium of exchange.
Goods and services are exchanged in terms of money.
Money is the basis of the pricing mechanism; through it, economic activities are adjusted.
Without money, all financial transactions would have to be conducted by a barter system
Importance in distribution
Money is used for the distribution of wages, interests and profits.
Wages are distributed to the labour.
Interest is distributed to the loan provider.
Profit is distributed to the investors or shareholders.
Importance in public finance
In the modern economy, government plays an important role.
Government receives income in the form of taxes, fees and public utility services.
The government uses these incomes for administrative and developmental purposes.
Importance in capital formation
The process of capital formation is impossible without money.
The financial institutions mobilize savings from the general public into productive uses.
Money serves as a great instrument of commerce and industry in the economy.
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Basic Journal Entries in Nepali |
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Journal Entry and Ledger |
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Ledger |
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Capital and Revenue |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Money serves as a major instrument in commerce and industry.
There are three major functions of money; they are primary functions, secondary functions and contingent functions.
(1) Primary functions
The primary function of money has further two subcategories; they are medium of exchange and measure of value.
(a) Medium of exchange
The primary function of money is to serve as a medium of exchange or as a means of payment.
Money solves all the difficulties of barter.
Money has ready purchasing power.
Being a medium of exchange, money facilitates the multiple exchanges of goods and services with minimum effort and time.
Therefore, everyone can buy or sell goods or services in exchange for money.
(b) Measure of value
Each unit of the goods or service can be measured in monetary value.
In a money economy, money can be treated as a common measure or common denominator of value.
Money acts as means of calculating the relative prices of goods and services.
For example, the rupee is the unit of account in Nepal, India and Pakistan; the dollar is the unit of account in the USA and so on.
(2) Secondary functions
The secondary function of money has further three subcategories; they are deferred payment, store value and transferring value.
(a) Deferred payments
Money serves as a standard of deferred payments.
Lending, borrowing and future transactions can be settled in terms of money.
If someone borrows a certain loan from somebody or a financial institution, he needs to repay the loan with interest.
Money becomes convenient to pay deferred payments.
(b) Store of value
Money acts as an efficient store of value.
Money has permanent purchasing power.
A person keeps some portion of his money as liquid assets.
Liquid assets can be used for any purpose at any time.
Anyone can store money to purchase goods and services in future.
(c) Transferring value
Money has transfer value.
Anyone can give money to anyone; the value of money is the same.
Anyone can buy or sell goods not only within the country but also in a foreign country.
Therefore, the value of money will be transferred.
(3) Contingent functions
The contingent function of money has further three subcategories; they are credit system, satisfaction and income distribution.
(a) Credit system
In modern business, credit is considered the heart of the business.
Banks performs many credit facilities for their customers.
Money helps a bank to perform these unique facilities.
These credit facilities may be in terms of credit card, bank overdraft, bank loan and hire purchase.
(b) Satisfaction
Satisfaction of the consumers is the most important in economics
Money helps both consumers and producers to maximize their satisfaction.
They can buy goods and services to satisfy their desire and need by paying money.
(c) Income distribution
Money helps the allocation of wages, rent, interest and profit.
They are incomes for related persons and organisations.
These are part of national income.
Keep in Mind
There are five functions of money; they are primary functions, secondary functions, contingent functions, static functions, dynamic functions. As per the syllabus, only the first three are explained. |
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There are various types of money in economics; out of them some major money is explained below:
In ancient times, a number of commodities were used as money; they were cattle like cows, sheep, ox, horses etc.
In medieval times, different types of grains, petroleum, precious metals and stones are used as commodities money.
Commodity money has intrinsic value.
Intrinsic value means a commodity has value even if it is not used as money.
The selection of commodity as money depends on the factors like geographical location of the community, socio-cultural values availability of commodity etc.
Here, metallic money means coins.
These coins are made from metals like gold, silver, copper, brass etc.
Gradually, the use of metallic money has decreased because they are heavy to carry and transport.
Moreover, metals are scarce and are not sufficiently meet the need for money at present time.
There are two types of metallic coins; they are standard coins and subsidiary coins.
Coins made from superior metals like gold and silver is called standard or full-bodied coins.
Coins made from inferior metals like brass, copper and zinc are called subsidiary coins.
Keep in Mind
Standard or full-bodied coins: |
Standard coins have definite weight and value. The face value (value printed on coin) of a standard coin is equal to its intrinsic value (value after melting it). It means the value of a standard coin does not fall even if we change its form by melting it. Nowadays such type of money is issued only on special occasions. |
Token or subsidiary coins: |
Coins made from inferior metals like brass, copper and zinc is called token or subsidiary coins. The face value of a token coin is more than its intrinsic value. It means the real value of a token coin disappears if we change its form. These coins are in use for small denominations like Re 1, Rs 2 Rs 5 and Rs 10 as per country or (5 cent, 10 cent, 25 cent etc.) |
Money made from paper and cotton is called paper money.
Paper money is issued by the central bank of a nation.
It holds unlimited legal tender.
The face value of paper money is more than its intrinsic value.
Generally, paper money is divided into two parts; they are representative money and fiat money.
Representative or convertible money is issued after keeping reserves.
These reserves are in the form of gold, silver and foreign currencies.
The ratios of the currencies and reserves may vary according to the country.
Fiat or inconvertible money is issued without keeping any reserve.
Keep in Mind
Representative or convertible money |
Representative paper money can be converted into gold and silver as per the need. So, this type of paper money is called convertible paper money. |
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Fiat or inconvertible money |
Paper money issued without keeping a cent per cent reserve of precious metals like gold and silver is called fiat money. Fiat money cannot be converted into gold and silver as per the need. So, this type of paper money is called inconvertible paper money. The face value of fiat money is many times higher than its intrinsic value. In these days mostly these types of money are in circulation. |
Bank money is also called credit money.
It is the modern form of money.
Bank issues credit instruments and financial institutions like bills of exchange, letters of credit, treasury bills, bonds etc.
It is not real money.
It only performs the function of money.
So, bank money is accepted as near to paper money.
These days, many people use credit cards or debit cards for banking transactions.
Banks and other financial institutions issue these cards.
By using a credit card they can buy goods and services on credit upto a certain limit even if they do not have money at their account.
By using a debit card, people can make transactions only upto the amount deposited at their bank account.
Due to the availability of the internet and smartphone, many people use mobile banking.
For mobile banking, users use the mobile banking application of a particular bank.
They can transfer money from one bank to another bank.
They can transfer money from a bank account to an online payment gateway and vice versa.
Online money payments in Nepal are eSewa, Khatli, Connect IPS, iPay etc.
Online money payments in Pakistan are EasyPaisa, JazzCash, Upaisa, GoLootLO, PayPak etc.
Online money payments in India are Paytm, BHIM, InstaMojo, PayU India, Citrus Pay, CCAvenue, EBS Payment Gateway etc.
Online money payments in international like Western Union, PayPal, MasterCard etc.
Cryptocurrency is digital money and digital asset.
It is also known as cryptocurrency or crypto.
It is designed to work as a medium of exchange.
Paper money and coins are recorded in accounting ledgers but cryptocurrency is recorded in a computer database by using strong cryptography.
Cryptocurrency typically does not exist in physical form like paper money.
Paper money is issued by the central bank of the country but cryptocurrency is not issued by a central authority.
Every country has its money.
Every country’s money has its value but the value of money depends on international trading and foreign exchange rate.
Good money should have the following qualities:
Acceptability
Good money should be acceptable everywhere.
There should be no doubt of its validity because metallic money possesses intrinsic value.
People can get the value of the metal used as money.
Stability
Here, stability means stability in the price level.
The total supply of metallic money does not change because it depends on the quantity of metals available.
Metals again depend on nature.
Durability
Good money should be durable.
Metallic money does not get destroyed easily.
They can be used over a long period of time.
They can also be stored for future payments.
Divisibility
Another quality of good money is its divisibility.
This quality facilitates a convenient exchange of goods i.e. goods can be easily exchanged in small divisions.
Small denominators such as 10 paisa (penny, cent), 25 paisa, 50 paisa coins and small divisions of money are possible,
This makes the exchange of goods very convenient.
Homogeneity
Here, homogeneity means the quality of being the same.
When you take two units of paper money note of $/Rs 10 of any country, they are homogeneity.
Their size, colour, value, design etc are the same quality or homogeneity.
They have the same purchasing power.
Exchanges can be made easily and the people do not hesitate to accept them.
Cognizable
Here, cognizable means able to know.
After looking at a currency note, we can tell its value.
If money is not cognizable then people can find it difficult to determine its dealing value.
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