Meaning - Value of Money
The value of money means the purchasing power of money over goods and services in a nation. Therefore, terminology “Value of Money” is a relative concept which articulates the association amidst a unit of money and the goods and services that can be acquired with it. This shows that the value of money is associated to the price level for the reason that goods and services are purchased with a money unit at given prices. But the association amidst the value of money and price level is a converse one.
Illustration 51
Calculate the measure of change in the value of money with the below data.
Year |
Wholesale Price Indices (P) |
2005-2006 |
200 |
2006-2007 |
180 |
2007-2008 |
260 |
2009-2010 |
300 |
Solution
Year |
Wholesale Price Indices |
% change in Price level (% ΔP) |
% change in the value of money (%ΔVm) |
2005-2006 |
200 |
- |
- |
2006-2007 |
180 |
-20 |
+20 |
2007-2008 |
260 |
+60 |
-60 |
2009-2010 |
300 |
+100 |
-100 |
Measurement of Changes in the Value of Money
To measure the value of money in a relative sense, all can be done is to compare its purchasing power of one phase with its purchasing power of another phase. Variations in the value of money are by the variations in the general level of prices over a period of phase.
Variations in diverse sets of prices can be evaluated by modes of an arithmetic tool known as “price index numbers”. An index number of the price is a presentation screening the height of average prices at one point comparative to their height at some other point that is taken as the base period.
Base year price index is regarded on a standard model of 100. Price changes and the subsequent variations in the value of money are therefore, considered as a percentage change.
The value of money varies in converse ration to the deviation in the trend of price over a given phase of moment.
Illustration 52
Below given tablet represents the prices of two diverse years. You are required to ascertain the following:
- Relative price proportion
- The index number of the year 2010
Article |
Price in year 2005 per unit in $ |
Price in 2010 per unit in $ |
I |
24 |
30 |
II |
45 |
72 |
III |
80 |
120 |
IV |
8 |
10 |
Solution
Article |
Price in year 2005 per unit in $ |
Price in 2010 per unit in $ |
Price
Relatives |
Value |
P0 |
P1 |
1 = P1 x 100 |
||
I |
24 |
30 |
30 x 100 |
125 |
II |
45 |
72 |
72 x 100 |
160 |
III |
80 |
120 |
120 x 100 |
150 |
IV |
8 |
10 |
10 x 100 |
125 |
ΣI = 560 |
Index number of the current year = ΣI
N
Where, Σ denotes the sum, I for the price relatives and N represents the number of items.
Therefore,
Index
number of 2010 = 560 = 140
4
In the above illustration, we have presumed that all items are of equal significance.
This may not be so. Therefore, in order to count the disparity amidst each item, it
becomes requisite to assign weights to them. Then a weighted average of price relatives
is to be compared.
Index numbers are constructed to measure the behaviour of diverse kinds of price averages. The most commonly used indices are of:
- The general level of prices of all goods, services and securities sold for money
- Retail prices of consumer goods
- Wholesale prices and
- The cost of living
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- Business Cycles
- Central Banking: Functions and Credit Control
- Credit Creation by Commercial Banks
- Demand for Money
- Dominance of the Keynesian Theory over the Traditional Quantity Theory of Money
- Friedman's Re-Statement of the Quantity Theory of Money
- Guards and Manages the Overseas Exchange Reserves
- Forms of Affluence Possessions
- Level of Bank Funds Deposit
- Measures to Control Inflation
- Nature and Definition of Money
- Neutrality and Non Neutrality of Money
- Inflation and Deflation
- Keynesian Approach or the Liquidity Preference
- Keynes Liquidity Preference Theory of Interest
- Keynesian Theory of Money and Prices
- Phases of Business Cycle
- Pigou Effect
- Real Balance Effect
- Remuneration Slash and Inclination to Consume
- Substitutability Theory
- Supply of Money
- Term Structure of Interest Rate
- Theories of Interest Rate
- Transaction Approach versus Cash Balance Approach
- Wage-Price Flexibility and Full Employment
