CONCEPT OF :MONEY & :BANKING

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Indian Economy.

              MONEY AND ITS FUNCTIONS:

 In earlier times, economic transactions used to happen as barter exchanges i.e. one commodity is exchanged for the other commodity. But for barter exchanges to happen there must be double coincidence of wants i.e. there should be diametrically opposite demand of the two parties doing the exchange. Consider, for example, an individual has a surplus of rice which he wishes to exchange for wheat. If he is not lucky enough, he may not be able to find another person who has the diametrically opposite demand for rice with a surplus of wheat to offer in exchange. The process can become very cumbersome in case of a large economy. To smoothen the transaction, an intermediate "commodity" is necessary which is acceptable to both the parties. The individuals can then sell their produce for this commodity and use this commodity to purchase the other goods that they need. Now what should be the characteristics of this commodity?

"If the production of goods and services in the economy is increasing, to facilitate the 

transaction we require more money in the system. So generally, money (supply) in the 

economy shall increase proportionately with the increase (nominal) in production of goods and services.

FUNCTIONS OF MONEY:

(i) Money acts as a medium of exchange. Facilitation of exchanges/transactions is the most important role of money.

(ii) Money also acts as a convenient unit of account. This means that the value of all goods and services can be expressed in monetary units. When we say that the value of a book is Rs. 300, we mean that the book can be exchanged for 300 units of money, where the unit is rupee in this case. So, the value of all goods and services can be expressed in rupee terms.

(iii)Money acts as a store of value. This means that wealth can be stored in the form of money for future use. Money is not perishable and its storage costs are also 

considerably lower and are acceptable to everyone at any point of time. It may be noted that any asset other than money can also act as a store of value i.e. gold, property etc. 

However, they may not be easily convertible to other commodities and do not have universal acceptability. In case the prices are rising steeply then the purchasing power of money erodes and the "store of value" function of money gets compromised as money starts losing its value.





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