- Facilitates Consumption and Production: Money gives consumers purchasing power and helps producers decide what and how much to produce based on prices and demand.
- Removes Difficulties of Barter System: Money eliminates problems like double coincidence of wants, indivisibility of goods, and lack of a common measure of value.
- Helps in Distribution of Income: Payments to factors of production such as wages, rent, interest, and profit are made easily in terms of money.
- Promotes Capital Formation: Savings are made in money form and mobilised by banks and financial institutions for investment and economic growth.
- Supports Trade and Exchange: Money facilitates smooth internal and international trade by acting as a medium of exchange and basis of price mechanism.
- Important for Public Finance and Social Welfare: Government collects revenue and incurs expenditure in money, and social welfare and standard of living are measured in monetary terms.
Definitions [1]
Definition: Barter System
“The direct exchange of economic goods, one for another.” — Chandler
Key Points
Key Points: Barter System
The barter system’s limitations—double coincidence of wants, no standard value, storage issues, indivisibility, and deferred payments—led to the invention of money, which streamlined trade and economic growth.
Key Points: Importance of Money
Key Points: Inflation
- Inflation means a persistent and significant rise in the general price level in an economy.
- It is not a one-time rise in prices; prices must rise continuously over time.
- Inflation is measured by the inflation rate, i.e. percentage increase in average prices.
- Two main types:
Demand-pull inflation – caused by excess demand over supply.
Cost-push inflation – caused by rise in production costs (wages, oil, profits).
