DOCSLIB.ORG

Concept of Money,Qtm & Keynesian Theory of Money Nta UGC-NET Dec

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Concept of Money,Qtm & Keynesian Theory of Money Nta UGC-NET Dec Nta UGC-NET dec-2018 Online batch ,Lecture-21 Macro eco Topic- 6 Concept of money,qtm & Keynesian theory of money UGC-NET PAPER-2 (ECO) CONCEPT OF MONEY Intro- The supply of money means the total stock of money (paper notes, coins and demand deposits of bank) in circulation which is held by the public at any particular point of time. Briefly money supply is the stock of money in circulation on a specific day. Thus two components of money supply are (i) currency (Paper notes and coins) (ii) Demand deposits of commercial banks. In other words, money held by its users (and not supplier) in spendable form at a point of time is termed as money supply. The stock of money held by government and the banking system are not included because they are suppliers or producers of money and cash balances held by them are not in actual circulation. In short, money supply includes currency held by public and net demand deposits in banks. Sources of Money Supply: (i) Government (which Issues one-rupee notes and all other coins) (ii) RBI (which issues paper currency) (iii) commercial banks (which create credit on the basis of demand deposits). Money Multiplier. money multiplieris the amount of money that banks generate with each currency of reserves. Reserves is the amount of deposits that the banks requires to hold and not lend. Formula 1 Money Multiplier(m) = Required Reserve Ratio Mathematical relationship between the monetary base and money supply of an economy. It explains the increase in the amount of cash in circulation generated by the banks' ability to lend money out of their depositors' funds. banks are required to keep at hand only a portion (between 10 to 15 percent, typically 12 percent) of the depositors' funds. This money-creating power is based on the fractional reserve system under which The rest may be converted into loans, 1. High Powered Money: High powered money or powerful money refers to that currency that has been issued by the Government and Reserve Bank of India. Some portion of this currency is kept along with the public while rest is kept as funds in Reserve Bank. H = C + R Where H = High Powered Money C = Currency with the public (Paper money + coins) R = Government and bank deposits with RBI Thus the sum total of money deposited with the public and the funds of banks is termed as powerful money. It is mainly created by the central bank. Reserve Fund is of two types: (i) Statutory Reserve Funds of banks which is with the central bank (RR), and (ii) Extra/excess Reserve Fund(ER). H = C + RR + ER High powered money is also known as secured money. high powered money is termed as Base money. Components of High Powered Money: 1. Currency with the public 2. Other Deposits with RBI 3. Cash with Banks 4. Banker’s Deposits with RBI. High powered Money (H) includes currency with Public (C), important reserves of Commercial banks and other reserve (ER). Thus we get the equation: H = C + RR + ER Supply of money (M) includes bank deposits (D) and currency with public (C). Thus, M = C + D Dividing both the equations, we get: Now, dividing the numerator and the denominator by D we get: m= By substituting Cr for C/D, RRr for RR/D, and ERr for ER/D, new equation become. 1+Cr It is also called money multiplier 1.Money multiplier- 1+Cr m= 2.Suply of money- 1+Cr M= mH= *H 3.High power money- M H= m measures of Money Supply In India Reserve Bank of India uses four alternative measures of money supply called M0. M1, M2, M3 and M4. Reserve Money (M0) The other name of the Reserve Money is “High Powered Money” and also “Monetary Base”. Reserve Money is all the Cash in the economy and denoted by M0. This has the following components: Currency with the Public Other Deposits with the RBI Cash Reserves of the banks held with themselves measures of Money Supply In India Reserve Bank of India uses four alternative measures of money supply called M1, M2, M3 and M4. (i) M1 = C + DD + OD. Here C denotes currency (paper notes and coins) held by public, DD stands for demand deposits in banks OD stands for other deposits in RBI. (ii) M2 = M1 (detailed above) + saving deposits with Post Office Saving Banks (ii) M3= M1 + Net Time deposits of Banks (iii) M4 = M3 + Total deposits with Post Office Saving Organisation (excluding NSC) Savings deposits of post offices are not a part of money supply because they do not serve as medium of exchange due to lack of cheque facility. Similarly, fixed deposits in commercial banks are not counted as money. Therefore, M1 treated as measures of narrow money . Whereas M3 as measures of broad money. Narrow money (M1)is the most liquid part of the money supply M4 is the Least liquid part of the money supply Sequence in terms of liquidity- M1>M2>M3>M4 It may be noted that liquidity means ability to convert an asset into money quickly and without loss of value. M3 as the official measure of money supply M1 = C + DD + OD M2 = M1 + POSD M3 = M1 + TD M4 = M3 + POSD RBI mostly relies on M3 measure for determine money supply Quantity theory of money QTM- QTM- Fisher’s Cambridge approach. approach. Cash transaction approach Cash balance approach Intro- the theory was first stated in 1566 by Jean Bodin, it received its full-fledged popularity at the hands of Irving Fisher in 1911. Later, an alternative approach was given by a group of Cambridge economists. However, the basic conclusion of these two theories is same price level varies directly with and proportionally to money supply. 1. Quantity Theory of Money— Fisher’s Version: In its simplest form, it states that the general price level (P) in an economy is directly dependent on the money supply (M); P = f(M) If M doubles, P will double. If M is reduced to half, P will decline by the same amount. This is the essence of the quantity theory of money. Like the price of a commodity, value of money is determinded by the supply of money and demand for money. In his theory of demand for money, Fisher attached emphasis on the use of money as a medium of exchange. In other words, money is demanded for transaction purposes. Demand for money is function of income. Rate of interest have not effect on demand for money. Fisher emphasized supply of money demand for money is constant. Fisher has explained his theory in terms of his equation of exchange: PT=MV+ M’ V’ Where P = price level, or 1/P = the value of money; M = the total quantity of legal tender money; V = the velocity of circulation of M; M’ – the total quantity of credit money; V’ = the velocity of circulation of credit money. T = the total amount of goods and services exchanged for money or transactions performed by money. This equation equates the demand for money (PT) to supply of money (MV=M’V’). The total volume of transactions multiplied by the price level (PT) represents the demand for money. The truth of this proposition is evident from the fact that if M and M’ are doubled, while V, V’ and T remain constant, P is also doubled, but the value of money (1/P) is reduced to half. Panel A shows the effect of changes in the quantity of money on the price level. To begin with, when the quantity of money is M, the price level is P. When the quantity of money is doubled to M2, the price level is also doubled to P2. Further, when the quantity of money is increased four-fold to M4, the price level also increases by four times to P4. This relationship is expressed by the curve P = f (M) from the origin at 45°. In panel В, the inverse relation between the quantity of money and the value of money is depicted When the quantity of money is M1 the value of money is 1/P. But with the doubling of the quantity of money to M2, the value of money becomes one-half of what it was before, 1/P2. And with the quantity of money increasing by four-fold to M4, the value of money is reduced by 1/P4. This inverse relationship between the quantity of money and the value of money is shown by downward sloping curve 1/P = f (M). Assumptions of the Theory: 1. P is passive factor in the equation of exchange which is affected by the other factors. 2. V and V’ are assumed to be constant and are independent of changes in M and M’. 3. T also remains constant and is independent of other factors such as M, M, V and V. 4. It is assumed that the demand for money is proportional to the value of transactions. 5. The supply of money is assumed as an exogenously determined constant. 6. The theory is applicable in the long run. 7. M and M’ are independent as well as constant. The Cambridge Version of the Quantity Theory Cash balance approach The Cambridge economists—like Alfred Marshall and A. C. Pigou,Robertson, and Keynes—presented an alternative to Fisher’s version of Quantity Theory. They have attempted to establish that the Quantity Theory of Money is a theory of demand for money (or liquidity preference). Prof. Fisher has considered money only as a medium of exchange while analysing the ‘Quantity Theory of Money.
Load more

Recommended publications
  • Cesifo Working Paper No. 3754 Category 7: Monetary Policy and International Finance March 2012
    The Quantity Theory of Money and Friedmanian Monetary Policy: An Empirical Investigation Claude Hillinger Bernd Süssmuth Marco Sunder CESIFO WORKING PAPER NO. 3754 CATEGORY 7: MONETARY POLICY AND INTERNATIONAL FINANCE MARCH 2012 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: www.CESifoT -group.org/wp T CESifo Working Paper No. 3754 The Quantity Theory of Money and Friedmanian Monetary Policy: An Empirical Investigation Abstract We introduce an approach for the empirical study of the quantity theory of money (QTM) that is novel both with respect to the specific steps taken as well as the general methodology employed. Empirical studies of the QTM have focused directly on the relationship between the rate of change of the money stock and inflation. We believe that this is an inferior starting point for several reasons and focus instead on the Cambridge form of the QTM. We find that the coefficient k fluctuates strongly in the short run, but has a low and steady rate of change in the long run, which makes the QTM a useful instrument for the long-run control of inflation. An important finding that contradicts all of the previous literature is that the QTM holds for low inflation as well as for high inflation. We discuss how our findings relate to monetarism generally and propose an adaption of McCallum’s rule for a Friedmanian monetary policy. JEL-Code: E310, E410, E510, E590. Keywords: Cambridge equation, Friedman’s k rule, monetarism, quantity theory.
    [Show full text]
  • The Demand for Money
    BSc Economics programme ECN 326: Monetary Economics Module 5 THE DEMAND FOR MONEY In Lecture 3, on the nature of money, we saw why there was a need for money: • to solve the double coincidence of wants problem associated with barter • to obviate the lack of trust between the payer and the payee in a transaction. However, what determines the quantity of money that individuals and economies demand is a separate question. It is the aim of this lecture to explain what determines the quantity of money we demand and also to present a number of models (or theories) of the demand for money. The lecture is majorly split into two main sections. The first part considers the demand for money from individuals or institutions/firms perspective, i.e., the microeconomic determinants of money demand. The second part examines the demand for money at the macroeconomic level, gives a brief history of money demand, focusing on the breakdown of the macroeconomic demand for money function. The ultimate aim of the lecture is to study the money demand as one of the building blocks of the money market equilibrium. The study of the demand for money function has long dominated empirical research in monetary economics. One is therefore tempted o inquire into the nature of this function that qualifies it for a special study. This is of particular importance as traditional microeconomics theory presents us with a generalized framework in which the demand for any good may be analyzed. Traditional theory approaches demand analysis by postulating that an individual derives satisfaction from the consumption of goods and services.
    [Show full text]
  • Unit 11: Demand for Money: Classical Approaches
    Demand for Money: ClassicalApproaches Unit-11 UNIT 11: DEMAND FOR MONEY: CLASSICAL APPROACHES UNIT STRUCTURE 11.1 Learning Objectives 11.2 Introduction 11.3 The Quantity Theory of Money: Basic Concepts 11.3.1 A Brief History 11.3.2 Definition 11.3.3 Assumptions 11.4 The Transactions Form of the Quantity Theory 11.4.1 Modified Version of Fisher's Equation 11.4.2 Criticisms 11.5 Cambridge Version: The Cash BalanceApproach 11.5.1 Superiority of the Cash BalanceApproach 11.5.2 Criticisms of the Cash Balance Approach 11.6 Let Us Sum Up 11.7 Answers to Check Your Progress 11.8 Further Reading 11.9 Model Questions 11.1 LEARNING OBJECTIVES After going through this unit, you will be able to- discuss the quantity theory of money and its different versions To explainhow a change in the supply of money influence the price level. 11.2 INTRODUCTION In the previous chapter we have discussed the theory of employment, Say's law of market and related thought of the classical economics. The classical school tried to examine and explain the interaction between various economics variables and to examine how closely they are inter-related. Macro Economics - I 201 Unit-11 Demand for Money: Classical Approaches Since money existed in its various forms and the economic activities are believed to be closely associated with money, the classical thinkers also tried to find out the relation between money and the working of economic variables such as price, demand, supply etc. In this unit, we shall discuss the approach of classical economics with respect to the relationship between the supply of money and the general price level in the economy.
    [Show full text]
  • Notes on the Accumulation and Utilization of Capital: Some Theoretical Issues
    Working Paper No. 952 Notes on the Accumulation and Utilization of Capital: Some Theoretical Issues by Michalis Nikiforos* Levy Economics Institute of Bard College April 2020 * For useful comments, the author would like to thank participants at the 45th annual Eastern Economic Association conference in New York and those at the 23rd Forum for Microeconomics and Macroeconomics conference in Berlin. The usual disclaimer applies The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. Levy Economics Institute P.O. Box 5000 Annandale-on-Hudson, NY 12504-5000 http://www.levyinstitute.org Copyright © Levy Economics Institute 2020 All rights reserved ISSN 1547-366X ABSTRACT This paper discusses some issues related to the triangle between capital accumulation, distribution, and capacity utilization. First, it explains why utilization is a crucial variable for the various theories of growth and distribution—more precisely, with regards to their ability to combine an autonomous role for demand (along Keynesian lines) and an institutionally determined distribution (along classical lines). Second, it responds to some recent criticism by Girardi and Pariboni (2019). I explain that their interpretation of the model in Nikiforos (2013) is misguided, and that the results of the model can be extended to the case of a monopolist.
    [Show full text]
  • Liquidity Preference
    liquidity preference Carlo Panico From The New Palgrave Dictionary of Economics, Second Edition, 2008 Edited by Steven N. Durlauf and Lawrence E. Blume Abstract Macmillan. Keynes’s notion of liquidity preference stems from the fact that he made some specific sources of demand for monetary instruments depend upon the expected Palgrave variations of the interest rate, and consequently on the expected variations in the capital value of financial assets. This source of demand was considered to be the Licensee: cause of variations in the rate of interest. Economists close to Keynes realized that in the General Theory he had turned the analysis of liquidity preference into a new theory of the interest rate. Robertson defended the marginalist theory, while Hicks permission. ‘ ’ paved the way for the neoclassical synthesis . without Keywords distribute or Cambridge equation; central bank money; finance motive; Hicks, J. R.; IS–LM copy models; Keynes, J. M.; liquidity preference; loanable funds; marginalist theory of the not rate of interest; monetary instruments; natural rate and average rate of interest; may neoclassical synthesis; precautionary motive; reserves–loans ratio; Robertson, D.; You saving and investment; simultaneous equilibrium; speculation; speculative motive; subjective probability; temporary equilibrium; Tobin, J.; transaction motive; uncertainty; Walras’s Law JEL classifications E4 www.dictionaryofeconomics.com. Article Economics. of The notion of ‘liquidity preference’ has become generally used in the literature on monetary issues (particularly that concerned with the interest rate) following Dictionary Keynes’s contributions in the 1930s. It concerns the motives for demanding monetary instruments or other close substitutes. Earlier, the analysis of the demand Palgrave for monetary instruments was based on other motives and concepts and led to New different conclusions.
    [Show full text]
  • Different Variants of Cash Balance Equation (Note-Compiled from Internet for Teaching Purpose )
    Different Variants of Cash Balance Equation (Note-Compiled from internet for teaching purpose ) There are various forms of cash balance equation. Important ones are described as follows: Marshall’s Equation: Dr. Marshall has explained the value of money through the M = kY below mentioned equation: (Here, M : quantity of money, Y: monetary income, K: that part of the income which people want to keep as cash) Because monetary income (Y) is the product of gross production (O) and price level (P), i.e., Y = PXO. Hence, the above equation may be written as follows: M = POk or P =M/Ok Pigou’s Equation: Pigou’s equation is as follows: P = kR M (Here, M: total quantity of money, R: gross actual income, k: That part of actual income which people want to keep as cash.) Value of money is inverse of the general price level. In Fig. 12.2, demand and supply of money is shown on axis OX and value of money is shown on axis OY. DD is the demand curve of money. Q1M1; Q2M2; Q3M3 are supply curves of money. At a specified point oftime, supply of money is constant; hence it is represented through a straight line. When supply of money increases from OM1 to OM2, then, value of money decreases from OP1 to OP2. Reduction in value of money is in proportion to increase in supply of money. In the same way, when supply of money increases from OM2 to OM3, value of money decreases from OP2 to OP3. Still in reference to change in value of money, Pigou has given more importance to K as compared to M.
    [Show full text]
  • Working Paper No. 594 Revisiting “New Cambridge”: the Three
    Working Paper No. 594 Revisiting “New Cambridge”: The Three Financial Balances in a General Stock-flow Consistent Applied Modeling Strategy By Claudio H Dos Santos1 Antonio C. Macedo e Silva2.3 May 2010 1 Research Scholar of the Levy Economics Institute of Bard College, New York, and Research Economist at the Institute for Applied Economic Research (IPEA), Brazil E-mail: [email protected]. 2 Professor of Macroeconomics at the University of Campinas, Brazil E-mail: [email protected]. 3 The authors would like to thank Francis Cripps, Franklin Serrano, Gennaro Zezza, Marc Lavoie and Wynne Godley for their comments on a previous version. The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. Levy Economics Institute P.O. Box 5000 Annandale-on-Hudson, NY 12504-5000 http://www.levyinstitute.org Copyright © Levy Economics Institute 2010 All rights reserved Abstract This paper argues that modified versions of the so-called “New Cambridge” approach to macroeconomic modeling are both quite useful for modeling real capitalist economies in historical time and perfectly compatible with the “vision” underlying modern Post- Keynesian stock-flow consistent macroeconomic models. As such, New Cambridge– type models appear to us as an important contribution to the tool kit available to applied macroeconomists in general.
    [Show full text]
  • Unit 3 Money and Prices
    UNIT 3 MONEY AND PRICES Structure Objectives Introduction Quantity Theory of Money 3.2.1 Cash Transactions Approiich 3.2.2 Cash Balances Approach 3.2.3 Comparison of Cash Balances Approacli and Cash Transactions Approach Keynes' Theory of Money and Prices Milton Friedman's Quantity Theory of Money Let UsSum Up Key Words Answers to Check Your Progress Terminal Questions After studying this unit, yo'u should be able to : 0 explain the factors which deternine the value of money and price level 0 justify the quantity theory of money @ differentiate between the cash transaction and cash balances approaches to the quantity theory of money @ outline the superiority of Keynes theory over classical theory of money @ analyse the restatement of quantity theory of money by Milton Friedman. 3.1 INTRODUCTION The value of money differs from the value of other objects in one fundamental respect, that is the value of money represents general purchasing power or commmr over 'things in general'. High prices of other things are reflected in the low exchangc value of money. Similarly,:low prices of other things mean high exchange value of money. The value of mbney is, tl~erefore,the reciprocal of the general price level (p and can be expressed as lip. , One of the basic problems is to identify the factors which determine the value of money or to explain the causes responsible for changes in the purchasing power of money. In this unit, you will study various theories related to the value of money ar prices. In particular, we will discuss the quantity theory, Keynesian theory and Milton Friedman's quantity theory of money.
    [Show full text]
  • The Central Bank Issuing Policy and Fisher´S Equation of Exchange
    THE CENTRAL BANK ISSUING POLICY AND FISHER´S EQUATION OF EXCHANGE Richard Pospíšil Abstract The issue of money and establishing interest rates are the main activities of central banks. Through this, the banks immediately influence the behaviour of households, companies, financial markets and the state with the impact on real outcome, employment and prices. When monitoring the issue of money, it is necessary to focus not only on its volume, but also on the attributes and functions carried by money. Among the first economists who considered the quality monetary aspect were J. Locke, D. Hume, D. Ricardo and others. The founders of modern monetarism of the 20th century were I. Fisher and M. Friedman. Fisher was the first to define the equation of monetary equilibrium in the present-day form. The objective of the paper is to point out different approaches to the equation and its modifications and different meanings of its variables. As regards the monetary aggregate M – Money – the paper also deals with the denomination of the aggregate to its various elements, which is significant for fulfilling monetary policy targets. This approach is very important especially at present in the time of crisis when central banks are performing their policy considering contradictory targets of price stability and economic growth. Keywords: issue of money, central bank, monetary policy, monetary equilibrium, money aggregates, monetarism, Irving Fisher, Milton Friedman JEL Classification: E52 Introduction The current economic crisis is primarily a budget and debt one. Nevertheless, together with public budgets and public debts, the issues of monetary policy have been continually and broadly discussed and thought out.
    [Show full text]
  • The Quantity Theory of Money in Historical Perspective
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Graff, Michael Working Paper The quantity theory of money in historical perspective KOF Working Papers, No. 196 Provided in Cooperation with: KOF Swiss Economic Institute, ETH Zurich Suggested Citation: Graff, Michael (2008) : The quantity theory of money in historical perspective, KOF Working Papers, No. 196, ETH Zurich, KOF Swiss Economic Institute, Zurich, http://dx.doi.org/10.3929/ethz-a-005582276 This Version is available at: http://hdl.handle.net/10419/50322 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you
    [Show full text]
  • The Quantity Theory of Money Is Valid. the New Keynesians Are Wrong!
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Hillinger, Claude; Süssmuth, Bernd Working Paper The Quantity Theory of Money is Valid. The New Keynesians are Wrong! Munich Discussion Paper, No. 2008-22 Provided in Cooperation with: University of Munich, Department of Economics Suggested Citation: Hillinger, Claude; Süssmuth, Bernd (2008) : The Quantity Theory of Money is Valid. The New Keynesians are Wrong!, Munich Discussion Paper, No. 2008-22, Ludwig- Maximilians-Universität München, Volkswirtschaftliche Fakultät, München, http://dx.doi.org/10.5282/ubm/epub.6987 This Version is available at: http://hdl.handle.net/10419/104270 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Claude Hillinger und Bernd Süssmuth: The Quantity Theory of Money is Valid.
    [Show full text]
  • G:\Lessons\Lesson (2020-21)\B.A
    B.A. PART II ECONOMICS LESSON NO. 1.4 THE QUANTITY THEORY OF MONEY: FISHER'S AND CAMBRIDGE EQUATION Meaning Value of commodity is defined as units of other commodity (or commodities) that can be exchanged with it or purchased with it. It is, therefore, the purchasing power of one commodity in terms of other commodities. Depending upon the conditions of market (that is, demand and supply) any particular commodity can be exchanged only with a very limited number of goods. It is not very realistic to assume that books can always and at all places be exchanged for cows, bicycles, wheat, fruit, cinema shows and so on. Thus, when goods exchange for goods, it is with a limited range that the actual process may take place. Value of money can be defined, in a similar fashion, as units of other commodities that can be purchased with it. But money can buy any economic goods. In fact, sometimes money itself is defined as a medium of exchange. Money can , therefore, be exchanged for any commodity. The range is very wide ; in fact, the whole market that is anything which is available in the market. We have heard people saying, not unrealistically, that money can buy anything . Therefore, value of money is its general purchasing power, what it can buy in the market or what can be exchanged for it. Let us now take the other side of the picture. Price of a commodity is defined as value of commodity in terms of money. It means the number of units of money that can be exchanged for a unit of one commodity.
    [Show full text]