Saturday, August 22, 2009

Social Significance of Money

Money plays an important part in the daily life of a person whether he is a consumer, a producer, a businessman, an academician, a politician or an administrator. Besides it influences the economy in number of ways.
(1) To the Consumer: Money possesses much significance for the consumer. The consumer receives his income in the form of money rather than in goods and services. With money in hands, he can get any commodity and service he likes, in whatever quantities he needs, and at any time he requires. The money enables a consumer to make rational distribution of his income on various commodities of his choice.
(2) To the Producer: Money is of equal importance to the producer. He keeps his account of the values of inputs and outputs in money. The raw materials purchased, the wages paid to the workers, the capital borrowed, the rent paid, the expenses on advertisement etc are all expenses of production which are entered in his account books. The sale of products in money terms are his sale proceeds. The difference between the two gives him profit. Thus a producer easily calculates not only his costs of production and receipts but also profit with the help of money. Further money helps in the general flow of goods and services from agricultural, industrial and tertiary sectors of the economy because all these activities are performed in terms of money.
(3) In Specialization of Division of Labour: Money plays an important role in large scale specialization and division of labour in modern production. Money helps the capitalist to pay wages to large number of workers engaged in specialised jobs on the basis of division of labour. Each worker is paid money wages in accordance with nature of work done by him. Thus money facilitates specialisation and division of labour in modern production. These in turn help in growth of industries. It is infact through money that production on large scale is possible.
(4) As the Basis of Credit: The entire modern business is based on credit and credit is based on money. All monetary transactions consist of cheques, drafts, bills of exchange etc. These are credit instruments which are not money. It is the bank deposits which are money. Banks issue such credit instruments and create credit. Credit creation in turn plays a major role in transferring funds from deposits to investors. Thus credit expands investment on the basis of public savings lying in bank deposits and helps in maintaining a circular flow of income within the economy.
(5) As a Means to Capital Formation: By transforming savings into investment, money acts as means to capital formation. Money is liquid asset which can be stored and storing of money implies savings and savings are kept in bank deposits to earn interest on them. Banks in turn lend these savings to businessman for investment in capital equipment, buying of raw materials, labour etc. From different sources and places. This makes capital mobile and leads to capital formation and economic growth.
(6) As an Index of Economic Growth: Money is also an index of economic growth. The various indicators of growth are national income, per capita income and economic welfare. These are calculated and measured in money terms. Changes in the value of money or prices also reflect the growth of an economy. Fall in the value of money (or rise in prices) means that the economy is not progressing in real terms. On the other hand a continuous rise in the value of money (or fall in prices) reflects retardation of the economy. Somewhat stable prices imply a growing economy. Thus money is an index of economic growth.
(7) In the Distribution and Calculation of Income: The rewards to the various factors of production in modern economy are paid in money. A worker gets his wages, capitalist his interest, a landlord his rent and an entrepreneur his profit in terms of money. An organiser is able to calculate the marginal productivity of each factor in terms of money and pay it accordingly. For this, he equalises the margin productivity of each factor with its price. Its price is, infact its marginal productivity expressed in terms of money. As payments are made to various factors of production in money, the calculation of national income becomes easy.
(8) To the Government: Money is of immense importance to the government. Money fadcilitates the buying and collection of taxes, fines, fees and prices of services rendered by the government to the people. It simplifies the floating and management of public debt and government expenditure on development and non development activities. It would be impossible for modern government to carry on their functions without the use of money. Not only this but modern governments are welfare states which aim at improving the standard of living of the people by removing poverty, inequalities and unemployment and achieving growth with stability. Money helps in achieving these goals of economic policy through its various instruments.
(9) To the Society: Money confers many social advantages. It is on the basis of money that the super structure of credit is built in the society which simplifies consumption, production, exchange and distribution. It promotes national unity when people use the same currency in every nook and corner of the country. It acts as lubricant for the social life of the people and oils the wheels of material progress. Money is at the back of social prestige and political power.
In a capitalistic economy money is the pivot around, which all economic activities cluster. Money is an indicator as well as a surveyor or wealth. The importance of money can be judged from the powerful influence which it exercises on the volume of production, direction of production, pattern of consumption, method of distribution, direction and volume of exchange and rate of saving and investment in the country, these all powerful effects of money are discussed as under.
(i) Production Pecisions: Production has been greatly fascilitated by the introduction of money. Money makes possible the accumulation of wealth in those hands which are able to organise the production. Production without the use of money cannot be organised on large scale and run efficiently and economically. The decision of what, where, when and how much to produce are guided by the amount of money offered in exchange of goods and services. The cost of production is also estimated in terms of money. The profit or loss which is the difference between the sale proceed and the total money cost is also expressed in terms of money. With the introduct of money, the consumption easily be postponed and the assets can be stored for use to future date. People also deposit their savings in banks which lent to the business firms and industrialists for further production of wealth.
(ii) Pattern of Consumption: According to Adam Smith “Consumption is the sole end and purpose of economic activity”. Under the primitive conditions of human existence the wants were limited in number and could easily be satisfied. With the introduction of money, the exchange of goods has become easy. People can sell their goods and services for money and can obtain the assortment of goods which they need by parting with money. Money thus has considerably increased the flow of commodities from producer to consumer and thus had led to the maximum satisfaction of the human being. In the absence of money a great variety to things would never have entered in our consumption list and so our satisfaction would have been at the lowest level.
(iii) Exchange of Transactions: In money less economy; exchange of goods was a very inconvenient process. People used to face difficulties of double coincidence of wants. There was also no common measure of value. The use of money has successfully removed the awkwardness of barter. Money by acting as a medium of exchange, has greatly stimulated, the exchange of goods. It splits up exchange process into two parts, sale and purchase and thus fascilitates flow of goods and services from producer to consumer.
(iv) Distribution of National Dividend: The four factors of production, combining together, produce a net aggregate of commodities every year. The share of each factor of production i.e. rent of land, wages of labour, interest on capital and profit to entrepreneur is paid in terms of money. If the share of each factor of production was to be paid by dividing joint products, it would have caused much inconvenience to each distributor. As money is generally acceptable as a medium of exchange and the same time acts as a measure and store of value, therefore the distribution of national dividend through the medium of money greatly fascilitates the process of distribution.
(v) Money in the Field of Public Finance: Money renders a valuable service in the field of public finance. Public finance in recent times aims at increasing the rate of economic activities and reducing inequalities of income. It also acts an instrument of economic and social justice in a country. Money helps the state in the achievement of these objectives. The government can easily raise revenue through the medium of money and can spend it for the betterment of the people.
(vi) Money in the Sphere of Banking: We know it very well that money serves as standard of deferred payments. The general confidence in the purchasing power of money makes it the chief form of credit. The debtor can safely borrow money for consumption or for production purposes. This has led to the building up of gigantic super structure of banking and credit system.
(vii) Attainment of High Level of Production and Employment: The introduction of money in the economy has fascilitated exchange. It has led to the high degree of specialization and interdependence of economic units. If the money is properly managed, it ensures rising level of Production, employment and real income in the country. In case the delicate instrument is not properly handled, it leads to decline in the prices, output and job opportunities. We thus find that the behaviour of employment, rate of output, level of price and distribution of national income are directly related to the monetary forces in the capital economy.


0 Responses to “Social Significance of Money”

Post a Comment

© 2013 Notes for Pakistan. All rights reserved.
Designed by SpicyTricks