Economics

Money and Supply of money & Drawbacks of Barter System

In this article we will study Money and Supply of Money. we will discuss the meaning of money and its evolution, Barter system with drawbacks and also the supply of Money and How it works.

Meaning and Evolution of Money :

Money is a thing which is commonly accepted as medium of exchange, it is only thing which fulfill day-to-day needs of human life. An individual himself does not produce all things he depends upon many other factors and he can buy all with exchange of money.                                                                       In old days ,there was barter system in which goods are exchange with goods that process is called C to C [ commodity to commodity ].After some time their is origin of money which facilitate human demand, and it is easy process to fulfill their needs.

Money is defined as an instrument that serve as a medium of exchange, store of value, a measure of value and a standard to deferred payments.

Barter System :

It refers to that system in which goods are exchanged for goods. In this system their is need of double coincident of wants.If you have surplus of rice you have to find that person who have need of rice and give another commodity in exchange which you need.

Drawbacks of barter system :

  1. Double coincidence of wants →  It means double coincidence in possession of two different commodities which  are needed by each others.
  2. Lack of common unit of value → In barter system their is lack of value of unit because only goods are exchanges with goods.
  3. Lack of system for future payments →  In barter system their is lack of future payment because only goods are exchange with goods.
  4. Lack of system for storage and Transfer of value →  Money is the only thing which we save for future needs but in barter system their is no storage system.

Forms of money :

  • Fiat money : That money which is issued by government authority like  notes and coins.
  • Fiduciary money : That money which is accepted as medium of exchange because of trust between payer and payee.
  • Full bodied money :  That money who money value is equal when issued like coins.
  • Credit money : That money whose value is more than commodity value.

Functions of money :

Primary functions

—Medium of exchange.

—Measure of value or unit of value

Secondary or Subsidiary functions

—Standard of deferred payment.

—Store of Value.

—Transfer of Value.

Concept of Supply Of Money :

It is a stock concept. It refers to the total stock of money held by the people of the country at a point of time. The stock of money does not include that money which is held by:

Government of India or

By the banking system of country.

Stock of money include only that money which is held by people. It can be measured as :

 M1 = C + DD + OD

where, C = Currency.

            DD = Demand Deposits.

             OD = Others Deposits.

The Principal Components of Money Supply :

  • Currency ( notes + coins ) held by the public.
  • Demand deposits  of the people with the commercial banks.
  • Other deposits with RBI.

So we have studied about Money and supply of Money and also we discussed the drawbacks of Barter System. For any query you can comment below.

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