CBSE Class 12 Economics - Money

BARTER SYSTEM

Before the invention of money, goods were exchanged with goods in order to satisfy mutual wants.

• This exchange where goods are exchanged for goods is referred as  ‘Barter Exchange ’.
• An economy where there is a direct barter of goods and services is called a ‘Barter Economy’ or ‘C-C Economy’ (where C refer to commodity)

For Example - When a person having sugar and in need of rice will exchange his sugar with someone who needs sugar and have rice with him.

The Basic idea of Barter system and the concept on which it works is Double Coincidence of wants which means that both the parties have to agree to see and buy each other’s commodity ie. what a person desire to see is exactly what the person wishes to buy.

Barter exchange leads to a huge ‘Trading cost ’ which are the costs involved in searching for a person who has those goods which he wants and he has those goods which other person wants.

LIMITATIONS OF. BARTER SYSTEM:

1. Lack of Double coincidence of wants - Barter exchange can work only if there is double coincidence of wants i.e A can exchange his goods with B only if A has what B wants and B have what A wants, and this situation is very rare.

2. Lack of common measure of value – Since all the commodity is not of the same value, it is difficult to measure that for how much of one commodity need to exchange with how much of B.

For example- If A have Gold and B have silver, and both want to exchange their goods. Since Gold and Silver have different value, it is difficult to measure that for how much of Gold is to be exchanged with how much of silver.

3. Lack of standard of deferred payments- Deferred payment is the where promise to make payment is fixed on a future specific date. Under barter system there is a lack of standard for deferred payments because of following reason:-

• It may not be possible to arrange the goods of exactly same quantity.
• The commodity at the time of repayment may lose or gain its value.

For example-Ram borrows 200kg wheat from Rahim at time of Harvest season. Since price of wheat would remain low during harvest season and at the time of repayment, it might be difficult to ascertain that what quantity of wheat is to be repaid at the time of repayment.

4. Lack of store of value- Sometimes its very difficult to store for future as-

• A lot of goods like vegetables and other edible stuff does not possess durability.
• Storing good requires time and efforts.

For example-if 1 kg of gold is exchanged for 50 buffalo, a lot of efforts, time as well as space is required to store them which is very difficult.

5. Lack of Divisibility-  There are some commodities, which cannot be divided without destroying their value.

For example - if a farmer having 20 kg rise wants to exchange it for a horse but a horse can be exchanged with 100 kg rice, Here it is impossible to divide the horse into pieces without destroying its value.

MONEY

Money is anything which is generally accepted as a medium of exchange , measure of value, store of value, and means for standard of deferred payments.

The term money includes following:-

Coins , Currency notes, Cheques etc.

Money Supply

Money Supply refer to total volume of money held by public particular point of time in an economy. Money includes ‘Money held by public only’ which includes individual and business firms. It does not include Government and Banking System.

Measures of Money Supply

The four alternative measure of money supply are as follows-

a) M1

M1  is the most basic measure of money supply. It is also known as ‘transaction money’ as all the components helps in direct transaction.

M1  = Currency and coins with Public+ Demand deposits of commercial banks + other deposits with RBI.

Currency and coins – It includes all coins and currency notes with public but excludes any currency held by Government and Banks. It is also termed as legal tender as it can be legally used to make payments of debts and other obligations.

Demand Deposits of Commercial Banks – It refers to demand deposits of public with commercial banks. Demand Deposits are those deposits which can be encashed by the depositor anytime by issuing cheque.

Other Deposits with Reserve Banks- It refers to all the deposits held by RBI on behalf of foreign banks , Governments, public financial institutions, world bank,1 Mf etc. However it does not include deposits by Indian Govt. and Commercial Banks.

b) M2

It is a broader concept of Money Supply as compared to M1

M2 = M1 + Savings with Post office Saving Bank.

c) M3

It is broader concept of Money Supply as compared to M1

M3=M1  + Net Time deposits with Banks

d) M4

M4= M3 + Total Deposits with Post office savings Bank

(Excluding National Saving Certificate)