Macroeconomics | Money | Class 12 | chapter 5 | One Shot

Key Concepts

• Money: Anything generally accepted as a medium of exchange, measure of value, store of value, and standard of deferred payments.
• Barter System: A system of exchange where goods are directly exchanged for other goods without using money.
• Double Coincidence of Wants: A situation in the barter system where both parties must want what the other has to offer for a trade to occur.
• CC Economy: An economy where commodities are exchanged for commodities, characteristic of a barter system.
• Fiat Money: Currency declared by a government to be legal tender.
• Legal Tender Money: Money that is legally recognized as a valid form of payment within a jurisdiction.
• Money Supply: The total volume of money held by the public at a particular point in time in an economy.
• M1, M2, M3, M4: Different measures of the money supply, each including various types of deposits and currency.
• Demand Deposits: Deposits in commercial banks that can be withdrawn on demand, typically through checks.
• Time Deposits: Deposits held for a fixed term, such as fixed deposits (FDs).

Barter System and Its Limitations

The video begins by highlighting the importance of money in any economy. It then explains that before money, people used the barter system, where goods were exchanged directly for other goods. An economy relying on the barter system is called a CC economy, where "C" stands for commodity.

The video details the problems with the barter system:

1. Lack of Double Coincidence of Wants: This is the most significant problem. For a trade to occur, both parties must want what the other possesses. The example given is wanting apples but the apple owner needing shoes, which the first person doesn't have.
2. Lack of Common Measure of Value: Different commodities have different values, leading to disputes. Value was determined by demand and supply, which was subjective and inconsistent. For example, arguing over how many apples are worth a pair of shoes.
3. Lack of Store of Value: Commodities cannot be easily stored for long periods without spoiling or losing value. Apples cannot be saved for future use.
4. Lack of Standard of Deferred Payments: Future payments or credit transactions are difficult because the quality and value of goods may change over time. It's hard to guarantee the same quality of apples for repayment after 10 years.

The Emergence and Functions of Money

The limitations of the barter system led to the invention of money. The video defines money as anything generally accepted as a medium of exchange, measure of value, store of value, and standard of deferred payments.

The functions of money are categorized into:

• Primary Functions:
  • Medium of Exchange: Money facilitates transactions for goods and services.
  • Measure of Value: Money provides a common unit for measuring the value of goods and services.
• Secondary Functions:
  • Store of Value: Money allows wealth to be saved and used in the future.
  • Standard of Deferred Payments: Money enables future transactions, such as loans and credit.

The video emphasizes that money solved all the drawbacks of the barter system by providing a universally accepted medium for transactions, a consistent measure of value, a means of storing wealth, and a basis for future payments.

Money Supply: Definition and Components

The video defines money supply as the total volume of money held by the public at a particular point in time in an economy. It is a stock concept because it is measured at a specific moment.

Key points about money supply:

• It includes money held by the public (individuals and firms).
• It excludes money held by the money-creating sector (government and banking system).

The video then discusses the components of money supply, specifically focusing on M1:

• M1: Includes:
  • Currency and coins with the public: All paper notes and coins held by the public. Currency money is also termed as fiat money, which is money by government order, and legal tender money, which is legally accepted.
  • Demand deposits with commercial banks: Deposits that can be withdrawn on demand, typically through checks. These include saving deposits and current account deposits. Net demand deposits exclude interbank deposits and term deposits (FDs).
  • Other deposits with RBI

The video briefly mentions other measures of money supply:

• M2: M1 plus savings deposits with post office savings banks.
• M3: M1 plus time deposits (fixed deposits) with commercial banks.
• M4: M3 plus total deposits with post office savings organizations (excluding National Savings Certificates).

The video emphasizes that M1 is the most liquid and basic measure of money supply.

Conclusion

The video concludes by summarizing the key concepts of money, the barter system, and money supply. It highlights how money solved the problems of the barter system and provides a foundation for modern economic activity. The video emphasizes the importance of understanding the components of money supply, particularly M1.