Title Chapter 1Basic concept.docx ✅

UNIT I Basic concept Background: Monetary economics is a branch of economics which deals about the importance of money. Concept of money, role of money, monetary institutions and the relationships between money and other variables like income and output (Y) employment (N) , price level (P), balance if payment (BOP) etc. therefore monetary economics deals all about the money related activities. So, money is the kingpin of the monetary economics. Monetary demand (Md) and money supply (Ms) are key factor in monetary economics to observe all the other macroeconomic variable and thereby in opposite of better economy. Where no money is used/employed, and the exchange takes place directly between goods and goods. Money: In the early of history, there was no money. People used to exchange the needs by exchanging goods with goods. This type of market is known as barter transaction market. In barter transaction market, people used ti face various difficulties such as difficulties of /to store the commodities, on pricing system of the commodities and so on. Exchange also takes a long time. Therefore, at that time money was the result of inconvenience faced by the people in barter transaction market. Invention/ origin/development / evolution of money: The word money is derived from the Latin word ‘Moneto’ which was the surname of the roman goddess of Juno in whose temple at Rome. Since the coins were minted in the temple of goddess Juno it was called money. Later on the word ‘Moneto’ was converted to money. With the change in time many things were used for money. People used animal, animal’s skin, light and strong stone and similarly they used the gold, silver, coins, paper, bank noted and electronic money with the change in time for money. The evolution of money has passed through the following different stages depending upon the progress of human civilization at different times and places. 1) The stage of animal money: In the early human civilization domestic animals were used for money. Cattle were considered the common instrument of exchange. People used cow, goat, buffalo and other domestic animals as common means of money. 2) The stage of commodity money: In this stage people used animal skin, arrows, matches, cigarette, bows, shells, etc. for money. The selection of a commodity to serve as money depend upon different factors
like the location of the community, climate if the region, cultural and economic development of the society etc. Animal and commodity money had however following disadvantages: i) Difficult to carry ii) Lack of easy transferability iii) Indivisibility iv) Difficult to store v) Difficult in transaction 3) The stage of metallic money: Commodity money is gradually replaced by metallic money when precious metals like gold, silver, copper etc. were discovered and used as a medium if exchange. There were lots of problem that people faced with animal and commodity money. There was high possibility of being destroyed or depreciated of animal and commodity money. There was also problem of transportation. To avoid these problems people started to use silver and gold for money till 17 th century. Metallic money had however following disadvantages: i) A large sum of money in terms of precious metal was not portable ii) Transaction were not feasible as a mode of payment iii) Unsafe to carry and could be easily lost or stolen 4) The stage of paper money: Paper money was introduced in between 17 th and 18 th century. Nowadays, it has become most popular form of money across the world. People would like to use paper money instead of metallic money because of easiness to carry. 5) The stage of bank money/ credit money: Bank money is most scientific form of money. It represents various kinds of credit instruments such as cheques, deposits, treasury bills, securities, bonds, debentures, letter of credit etc. Meaning of Money: Generally, the money is known as the currency, currency is the sum of notes and coins produced by the central banks and monetary authority. Note are produced only by central bank. But coins are may be or may not be by the central bank. It means, coins are produced by central bank as well as another monetary authority. But notes are produced only by central bank. In Nepal, Upto 1985 (just before the economic liberalization) coins were not produced by central bank, rather were produced by ministry of Finance. After 1985 with the economic liberalization, the production of coins was also started by central bank of Nepal. Therefore, in the context of Nepal, Nepal rastra bank is known as central bank of Nepal as well as monetary authority of Nepal.
But in the subject economic specially in monetary economics/ financial economics or in the subject of finance the meaning of money is not so simple and straight. There are various arguments on money given by different economist at different time period. According to F. A Walker “Money is that what money does.” It means money is thing, that performs the function of money. Similarly, according to Alfred Marshall “Money include those all things that can be used in the exchange of goods/services and other payments at any time, any place and for any purpose.” Again, according to D.H Robertson ”Money is that which is widely accepted in transaction of goods and services and other payments. Store in value units of accounts discharge of any kinds of business obligations.” Moreover, according to G. crother Money is anything that generally performs act of medium of exchange, store in value, and measurement of value, transfer of value and standard of differed of payments (used for credit transaction). Value of money: It means the purchasing power of money as one unit of cash or money could purchase given unit of goods and service (i.e. output). So the purchasing power of money depends upon the given market price of goods and services and there is an inverse relationship between them. {i.e.p = 1/p } There are basically three observations of value of money like wholesale value of money. Retail value of money and labor value of money. 1) Wholesale value of money: There is inverse relationship between wholesale price and wholesale value of money. 2) Retail value of money: It is associated with the retail price of products. There is also an inverse relationship between retail price and retail value of money. In fact, we get in the market the retail market price is higher than that of wholesale market price. Therefore, the wholesale value of money is higher that retail value of money. But decreasing rate of money value if retail is less than decreasing rate of wholesale value of money because of percentage of profit. The percentage of profit of retail market is higher than percentage profit of wholesale market. We also know that the wholesale value of money is basically concerned with producer, trader, entrepreneur etc. but the retail value of money is concerned with we common people. 3) Labor value of money: It is related to the wage payable to the workers on the basis of their work and there is also an inverse relationship between them. Basically, it is concerned with the master or producer of any output. Function of Money:
There is no doubt money is most important thing in the economy. In the modern era, money is the main important variable for the economic development of any society. If money was not introduced, todays world would nit be possible. But what is money? To give the appropriate definition of money economist spent almost two centuries. At one time, money was what it is, but now, what money does is important question. Money performs a number of primary, secondary, contingent and other functions which not only removes the difficulties of barter but also the wheels of trade and industry in the present-day world. Following are the major functions of money: 1) Primary functions The two-primary function of money is to act as a medium of exchange and as a measure of value. i) Money as a medium of exchange: The primary function of unique and most important function of money is that it serves as a medium of exchange. It facilitates greatly exchange of goods and services. It saves the time and solves the problem of double coincidence of wants. When money acts as a medium of exchange of exchange, it means that is generally acceptable. It therefore affords the freedom of choice. With money, we can buy an assorted bundle of good and services. At the same time we can purchase the best and also bargain in the market. Thus money gives us a good deal of economic independence and also prefers the market mechanism by increasing competition and widening the market. ii) Money as a measure of value: Another important function of money is that it serves as a common measure of value. In terms of which the values of goods and services are expressed. Money also acts as a unit of account. It provides a basis for keeping accounts which are most essentials for comparison, exchange, evaluation, policy formulation and so on. This function of money helps economy to grow as a service. 2) Secondary Functions: Following are the secondary function of money: i) Store in value (physical condition in prefer way) ii) Transfer of value iii) Standard deferred payment (future payment) 3) Contingent Functions: i) Distribution of national income (rent, wage, interest) ii) Basis of banks/ credit money iii) Maximizing satisfaction and profit