money its nature and functions & balance of payments

05/03/2023

NATURE & FUNCTIONS OF

MONEY&

BALANCE OF PAYMENTSSubmitted by:-Satyanarayana Boda1st year MFScF.E.C – 501 Dept. of F.E.S

Submitted to:-Dr. S.SahuDr. C. Chakrabarti

Dept. of F.E.S, F.F.Sc, W.B.U.A.F.SC

05/03/2023 Dept. of F.E.S, F.F.Sc, W.B.U.A.F.SC

History • Ancient man – less wants.• Barter system evolved.• Unending human wants led to creation of money.


Inconveniences of Barter• Need for Double Coincidence.• Difficulty of Sub-division.• Absence of Common Measure of Value• No store of value, creating the necessity of money.


Evolution of Money

Commodity money, metallic money, paper/ currency

money, finally bank money.

DEFINITION OF MONEYIt is anything which is generally accepted in exchange

for other things and which can discharge all

obligations, past and present.


SCITOVSKY DEFINITION

• “Money is a difficult concept to define, partly

because it fulfills not one but three functions, each

of them providing a criterion of moneyness … those

of a unit of account, a medium of exchange, and a

store of value.”


PROFESSOR COULBORN DEFINITION

• “The means of valuation and of payment;

as both the unit of account and the

generally acceptable medium of exchange.”

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SIR JOHN HICKS DEFINITION

• “Money is defined by its functions:

anything is money which is used as

money: ‘money is what money does.”

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The Traditional Definition of Money

• Money is defined as currency and demand

deposits, and it’s most important function is to

act as a medium of exchange.


FRIEDMAN’S DEFINITION OF MONEY

• “Literally the number of dollars people are

carrying around in their pockets, the number

of dollars they have to their credit at banks in

the form of demand deposits and commercial

bank time deposits”.


THE RADCLIFFE DEFINITION• Note plus bank deposits

THE GURLEY-SHAW DEFINITION• Equal to currency plus demand deposits is only

one liquid asset.


EVOLUTION OF THE PAYMENTS SYSTEM• Commodity Money: Gold, Silver, other precious

metals, certain stones, Cigarettes, etc.• Representative money : That is backed 100 % by

precious metals (bank notes )• Fiat Money: No consumption or investment use:

intrinsically useless pieces of paper.• Token money• Checks• Electronic Payments: EFTs, wire transfers. • E-money: Debit cards….


Functions of Money

1. Primary functions – (I) Money as a Medium of Exchange.(ii) Money as Unit of Value.

2. Secondary Functions – (i) Money as a Standard of Deferred Payments.(ii) Money as a Store of Value.(iii) Money as a Transfer of Value.


3. Contingent Functions.(i) Money as the Most Liquid of all Liquid Assets.(ii) Basis of the Credit System:(iii) Equalizer of Marginal Utilities and Productivities:(iv) Measurement of National Income:(v) Distribution of National Income:

4. Other Functions.(i) Helpful in making decisions.(ii) Money as a Basis of Adjustment


Money versus Barter• Without money, the only way to do business is by

bartering.• For barter to work, I must want what you have and

you must want what I have– This makes it pretty difficult to do business

• “Everything, then, must be assessed in money: for this enables men always to exchange their services, and so makes society possible”– Aristotle, Nicomachean Ethics


Characteristics of money• Durability – • Portability –• Divisibility –• Uniformity – • Acceptance – • Malleability – • Limited supply – • Stability – • Acceptability –


VALUE OF MONEY• Quantity of goods that can be exchange with one

unit of money.Measurements of change in value of money.

1. Deflation – Increasing in purchasing power of money.

2. Inflation – Decreasing of purchasing power of money.

3. Index numbers – Number used to denote change in money value.


Index number

• Definition.• Price index numbers.

Preparation:-Select base year.Commodity selection.Collection of price statistics.Calculate present price as % of base year.Take out average of both year prices & present

price.


USES OF INDEX NUMBERS.

• Measure quantitative changes in wages, import…

• Indicate social conditions for policy makers.

• Compare conditions of various class of people &

their standard of living.

• It indicates the discharge of borrowings & lendings.


INFLATION • Causes• Demand induced inflation.• Cost induced inflation.• Money induced inflation.• Remedies.• Price control.• Monetary measures.• Fiscal policy.


Balance of Payments


INTRODUCTION

• Statistical record of a country’s international

transactions over a certain period of time presented

in the form of double-entry bookkeeping.

• Provides information about supply and demand of

the country’s currency.

• Shows developments in a country’s comparative

advantage and international competitiveness.


BOP STATEMENT INCLUDES

All the receipts on account of goods exported.

Services rendered.

Capital received by residents.

Payments of residents.

Capital transferred to foreign.


COMPONENTS OF BOP• Current account.• Capital account.


CURRENT ACCOUNT

• It includes visible imports and exports and invisible

items like receipts payments for various services.

• It contain debit and credit items.

• Credit include merchandise exports and invisible

exports.

• Debit include merchandise imports and invisible

imports.


BOP STATUS OF INDIA IN CURRENT ACCOUNT • Satisfactory five year plan.• Inflow of foreign capital is 127 cr. And deficit of

current account is 42.3 cr.• 2nd & 3rd 5yr plans show negative BOP .• 4th & 5th 5yr plans show positive BOP with 100 cr.

and 3082 cr. respectively.• From 1985-86 & 1989-90 BOP is negative.• From 2001-02 to 2004-05 BOP was surplus but

2005-6 it show deficit and again in 2008-09 BOP was positive..


REASONS FOR DEFICIT BALANCE• Import liberalization in 1985.• Gulf war in 1990.• Industrialization.• Slow growth of invisibles.• Depreciation of rupee.• 1990-91 crisis.• Less exports.


THE CAPITAL ACCOUNT • Records sales to foreigners of financial assets purchases of

foreign financial assets.• The capital account is composed of Foreign Direct

Investment (FDI), portfolio investments, and other investment.– Direct investment involves acquisitions of controlling

interests in foreign businesses. – Portfolio investment represents investment in foreign

shares and bonds that do not involve acquisitions of control.

– Other investment includes bank deposits, currency investment, trade credit and the like.


CAPITAL ACCOUNT IS DIVIDED INTO• Private capital.• Banking capital.• Official capital.

Private capital.Long term loan (>1year). - Foreign investments. - Long term loan. - Foreign currency deposits. - Unclaimed receipts.Short term loan (<1year)


BANK CAPITAL• External financial assets.• Liabilities of commercial & cooperative banks authorized

to deal in foreign currency.

• RBI’s holdings in case of foreign currency and special drawings rights..

• Capital outflow to foreign is treated as debit.• Capital inflow from foreign is treated as credit.• Credit includes long & short term investment in home

country.• Debit includes long & short term investment in foreign

country.

OFFICIAL CAPITAL

money its nature and functions & balance of payments

Economy & Finance