According to Marshall “Anything by which goods and services can be exchanged at any time and place without suspicion or special scrutiny is called money.”
According to Robertson ‘All that is accepted in exchange for goods and services is money.’ Thus, what money does is money. To understand money one must understand the functions of money.
The main functions of finance are as follows:
- Function of Medium of Exchange: The most important function of money is as a medium of exchange. Money facilitates our economic transactions and solves the difficulty of matching needs in barter system. A farmer gets money by giving wheat and then gets money by giving rice, cloth, tea etc. A person acquires goods and services in the present by spending money, while saving acquires goods and services in the future. Basically money is used as a medium to buy useful goods and services to satisfy needs.
- As a collector of value: Another important function of money is as a store of value. A person gets another thing or service by giving a thing or service produced by himself, but how can he save to get the thing or service in the future? That was the question, through money it could store exchange value. Storage of value in the form of grain or cattle was no longer possible. Money has proven more successful in this regard. Storage of value in the form of money is simple. By selling grain, money is collected to store value in the form of money and then when needed, goods or services can be purchased through it.
It is only because money is successful as a store of value that it has become a standard of deferred payment. It is this feature of money that has helped to lay the foundations of the entire system of credit, the system of borrowing, buying and selling, and the installment system.
- Function as a measure of value: Money plays an important role as a measure of value. In the practice of barter, the exchange value of each item had to be remembered. One maund of wheat is exactly how many maunds of rice? How many meters of cloth? How many kilos, how many pairs of shoes? etc…
Money makes this task easier. Because of money the pricing system works and everything is priced for the service and consequently the calculation of value becomes easy. A comparative study of value for money makes it easy to process decisions quickly.
- Types of Money: Since the days of barter, animals or precious stones have been used to act as mediums of exchange or collectors of value. Later Patu coins did this and then came currency notes and coins as legal tender and bank-money as the banking system developed. Now money has taken a new form in credit card or e-banking. Briefly consider the types of money So
(1) physical money (invisible or e-money).
(2) Cattle money
(3) Part money plastic money
(4) Paper
(5) Money
(6) Bank money
- Meaning of Inflation Generally price increase means inflation.
Inflation is an economic problem and a financial phenomenon. Common people consider the increase in the prices of goods as inflation, but in economics, an effort has been made to give a clear meaning to inflation
- Characteristics of Inflation
(1) The price level rises continuously.
(2) Prices rise in all sectors of the economy.
(3) Value of money (purchasing power) decreases.
(4) There is rising price level inflation after full employment condition.
In order to understand inflation, several other factors must also be considered, such as,
(1) If the government has suppressed the price level through legislation, subsidies, there is inflation even though prices are not rising. It is also called under inflation.
(2) Even if there is a price rise in the economy for a short period of time, for a particular service or commodity, it is not inflation.
(3) Producers are motivated to produce more when resources are idle in the economy. Hence these tools will come into use and the production will increase and the prices will come down.
In short, after the condition of full employment, inflation is the persistent increase in the price level in all sectors of the economy and such inflation is a hindrance to economic growth.
- Causes of Inflation: Inflation is a continuous increase in the prices of goods and services in all sectors of the economy. Now there are two main factors that determine the price of a good or service: demand and supply. Therefore, these two factors are mainly responsible for the rise in prices, i.e. the main causes of inflation are: (1) Increase in demand, (2) Increase in costs.
- Increase in demand: An increase in the demand for a commodity leads to an increase in the price of the commodity. If the demand for a commodity does not exceed the supply of the commodity during the year and even if it does, it increases at a very slow rate
The price of the item increases. If inflation occurs due to increase in demand in the economy, then such inflation is called demand driven inflation. Reasons for increase in demand of a commodity are as follows.
(1) Increase in money supply : Monetarists consider inflation as a purely monetary phenomenon. According to him, the financial income of the people increases due to the increase in money supply in the country and the increase in income increases the demand for goods and services. On the other hand, as the supply is almost constant, the prices increase. In any money-based economy, inflation occurs when the quantity of money exceeds the quantity of goods and services. That’s why Macklap says, “Inflation occurs when too much money runs to catch up with too few things.
(2) Increase in Government Public Expenditure : In developing countries like India, the government engages in many economic processes for economic development. Creation of intra-capital infrastructure The government spends public expenditure on activities such as providing basic needs or creating employment, thereby increasing the money supply in the country. As people’s income increases and demand increases, prices rise. If the government puts a greater amount of money-supply into the economy than the country produces goods and services. Inflation accelerates if public spending.
(3) Population Growth : Population growing at an average rate of 2 percent in India has created demand growth pressure. Continuous Growing population increases the demand for daily consumption goods and the demand of growing population is not met When possible, the price level increases. Even if the population is stable but their incomes increase Demand increases.
Thus, an increase in income due to an increase in the money-supply increases demand and raises the price level.
(4)Cost escalation: Another factor affecting price is supply Proponents of supply-oriented economics believe that even if production costs rise, the prices of goods rise.
The price of a good or service increases due to increase in prices of raw materials, machinery, electricity, water rates, labor wages, transportation costs. Inflation that occurs due to an increase in expenditure is also called expenditure-driven inflation.
