Our Business Studies Notes
Part A – Principles and Functions of Management
Part B – Business Finance and Marketing
1. Meaning of Money
Money is anything that is generally accepted as a medium of exchange, measure of value, standard of deferred payments, and store of value. It overcomes the limitations of the barter system by facilitating trade and specialization.
2. Evolution of Money
Barter System – Direct exchange of goods/services without money; suffered from the double coincidence of wants, lack of common measure of value, difficulty in storing wealth, and indivisibility of certain goods.
Commodity Money – Items like gold, silver, or grain used as money.
Metallic Money – Standardized coins made from metals.
Paper Money – Currency notes issued by the central bank.
Credit Money – Bank deposits, cheques, demand drafts.
Near Money – Assets that can be quickly converted into money (e.g., bonds, bills of exchange).
3. Functions of Money
Primary Functions
Medium of Exchange – Facilitates buying and selling of goods/services.
Measure of Value – Common unit to measure value of goods/services.
Secondary Functions
Store of Value – Preserves purchasing power for future use.
Standard of Deferred Payments – Facilitates future payments in contracts and loans.
Transfer of Value – Allows transfer of purchasing power between people and places.
Contingent Functions
Basis of credit.
Distribution of national income.
Maximizes utility.
4. Supply of Money
Definition: Total stock of money (currency + demand deposits) available in the economy at a given time.
Components:
M1 = Currency with the public + Demand deposits + Other deposits with RBI.
M2, M3, M4 – Broader measures including time deposits and post office savings.
In India, M3 is the most commonly used measure for monetary policy.
5. Role of Money in a Modern Economy
Eliminates barter system problems.
Promotes specialization and division of labour.
Facilitates large-scale production and trade.
Essential for credit creation and economic growth.
6. Money Creation by Commercial Banks
Primary Deposits: Cash deposits from the public.
Credit Creation Process: Through lending, banks create secondary deposits, expanding the money supply.
Credit Multiplier: 1 / Cash Reserve Ratio (CRR).
7. Importance in Macroeconomics
Influences aggregate demand and supply.
Impacts inflation and deflation.
Central to monetary policy formulation.