Chapter 6 complete

6.2 Commodity and Money
What we consume and trade is commodity. For consumption of a commodity or for trade, we 
need money. For economists, money does not refer to all wealth but only to stock of assets 
that can be readily used to make transactions. Roughly speaking, the Rupees in the hands of 
the public make up the nation’s stock of money. Money has three important functions or 
purposes and that is: (i) it is a unit of account or measure of value, (ii) it is a store of value, 
(iii) it is a medium of exchange, (iv) money is a transfer of value, and (v) standard of deferred 
payments. Money is a unit of account because it provides the terms in which prices and debts 
are recorded. Money serves as a measure of value in terms of unit of account. Unit of account 
means that the value of goods and services is measured in the monetary unit (i.e., in India 
monetary unit is Rs.). Money is a store of value in the sense that we can transfer the 
purchasing power of money from present to the future. If I work today and earn Rs. 50,000, I 
can hold the money and spend it tomorrow, next week, or any time in the future. Money acts 
as a medium of exchange for the sale of goods and services. “I Promise To Pay The Bearer 
The Sum Of One Hundred Rupees” is printed on the Indian Rupees. Similarly, in the U.S. 
dollar it is printed that (This note is legal tender for all debts, public and private). These 
currencies can be exchanged for goods and services anytime we want. Through money we 
can transfer value from one place to another. For example, if we want to purchase plot or 
invest far-off places, we can purchase or invest with the help of purchasing power of money. 
Deferred payments are those payments that are made to make payments in future. For 
example, when we borrow money, we have to return both the principal amount and interest 
amount in future. The above functions of money (i.e., medium of exchange, measure of 
value, store of value, and standard for deferred payments) are called the static or conventional 
functions of money. The static functions are those which facilitate the working of the 
economy of a country. These functions only help to regulate the economic system; they do 
not stimulate the system to a higher level of growth and development. Dynamic functions of 
money on the other hand are those functions which cause movements in the level of 
economic activity in an economy. This function helps to impart stability to the economy and 
push an economy to a higher level of growth and development. For example, the functions of 
money as the basis of credit or liquidity actually bring about changes in the economic activity 

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in a country. Classification of function of money on the basis of static and dynamic function 
is associated with the name of Paul Einzing.
The quantity of money available is called the money supply. The sources of supply 
of money are government, central bank of the country, and commercial bank (commercial 
banks do not issue currency but definitely they contribute to the supply of money). In India, it 
is Ministry of Finance that issue one –rupee notes and all the coins. Money is supply by the 
Reserve Bank of India, which is the central bank of the country. The control over the money 
supply is called the monetary policy. Monetary policy is delegated to a particularly 
independent institution in every country called central bank of that country. The Reserve 
Bank of India is the central bank of India. The primarily way to control the supply of money 
is through the open-market-operations – the purchase and sale of government bonds. This 
action of central bank affects the supply of money and thereby the value of money. The value 
of anything is measured by what it can get in trade. In general the value of money depends on 
the supply of money relative to the supply of goods and services people would like to sell. If 
demand for goods and services are more than the quantity of goods and services offered in 
the market, prices of commodity rises. As prices of commodity rises, purchasing power of 
currency falls down so that the same currency will buy less and less quantity of goods and 
services. Consequently, value of money or currency falls down. This shows that the price of 
commodity and the price of currency are inversely related to each other. For example, if price 
of wheat is Rs.5, then the value (price of currency) will be 1/5. So value is reverse of price 
and it can be written as
Vm = 1/P
6.1 
Where, Vm = value of the money/currency, P = price of the commodity 
As we know that the prices of goods decreases when its quantity increases in the market. 
Similarly the price of money (i.e., interest) declines (i.e., rate of interest falls) as the supply of 
money increases in the economy. Variations in the quantity of money have important 
influence on the course of prices, money income, real income, rate of interest and other 
economic variables. The major task of traditional theory has been to analyse to this influence 
in a coherent manner. There are two main approaches to this task: (i) the quantity theory of 
money approach, and (ii) the Keynesian approach