Money and credit

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money and credit

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MONEY AND CREDIT :

MONEY AND CREDIT S.K.OJHA TGT (S.St) K.V.DLW, VARANASI 1

Basic Kinds of Economic Interaction :

2 Basic Kinds of Economic Interaction Gifts -- Transfer of value without any particular expectation of anything in return. Involuntary Transfers – e.g. , theft, robbery, extortion, taxes. Reciprocal Exchange – equal exchange of value between two parties by voluntary agreement.

Reciprocal Exchange:

3 Reciprocal Exchange The first stage in the development of the process of reciprocal exchange was barter trade

Barter Trade:

4 Barter Trade Barter is the most primitive form of reciprocal exchange. Barter involves only two people; each has something the other wants.

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5 I’ll give you shoes For your wheat. I don’t need shoes I need clothes. I want shoes But I don’t have wheat. Barter depends upon the coincidence of wants and needs.

Absence of common measure of value. :

Absence of common measure of value. I’ll give you shoes For your wheat. Yes I needs shoes. The problem arises in what proportion of the two goods are to be exchanged ?

Lack of Divisibility:

Lack of Divisibility I wants to purchase clothes equal to the value of the half of cow . But cannot do so without killing the cow.

Difficulty in storing wealth for future:

Difficulty in storing wealth for future I wants to use these things in purchasing of goods after forty years. But how store these wealth ?

Problems of Barter System:

9 Problems of Barter System Barter depends upon the coincidence of wants and needs. Absence of common measure of value. Lack of divisibility. Difficult in storing wealth

Money Plays Its Role Within the Realm of Reciprocal Exchange:

Money Plays Its Role Within the Realm of Reciprocal Exchange

Commodity Money:

11 Commodity Money The most primitive type of money is commodity money. Commodity money is money whose value comes from a commodity out of which it is made. Some useful commodity that is in general demand is used as an exchange medium and may serve both as a payment medium and a measure of value. Money may be defined as ‘anything which is generally accepted by the People in exchange of goods and services or in repayment of debts’. Money Evolution of money

Examples of Commodity Money:

12 Examples of Commodity Money Various commodities have historically served as money – Cattle, tobacco, sugar, grains, nails, shells, hides, metals, etc. But the transaction is still essentially a barter trade of one good or service for another good.

Metallic Money An example could be gold and silver coins that have values roughly equal to the value of the metal . :

13 Metallic Money An example could be gold and silver coins that have values roughly equal to the value of the metal . Metals became the commodities of choice because they are durable, fungible (divisible), and easily portable. “In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity.” – Adam Smith, Wealth of Nations , p. 30

Metallic money in different periods.:

Metallic money in different periods. PUNCH MARKED COINS. GUPTA COIN. TUGHLAQ COINS. AKBAR’S COIN. MODERN COIN.

The First Kind of Paper Money:

15 Bank Gold The first bank notes were symbolic money. They were warehouse receipts for gold or silver placed on deposit. The First Kind of Paper Money Symbolic Money

The Second Evolutionary Step From commodity money to credit money:

16 The Second Evolutionary Step From commodity money to credit money “Some ingenious goldsmith conceived the epoch-making notion of giving notes not only to those who had deposited metal, but to those who came to borrow it, and so founded modern banking.” Hartley Withers, The Meaning of Money , p. 18

Modern forms of money solves the problems of Barter System:

17 Modern forms of money solves the problems of Barter System FUNCTION OF MONEY 1)THE MEDIUM OF EXCHANGE. 2)UNIT OF ACCOUNT. 3)THE STANDARD OF DEFERRED PAYMENTS. 4)STORE OF VALUE.

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Modern forms of Money Currency Demand Deposits Paper Notes Coins Cheque Demand Draft Credit Cards

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19

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20 BORROWERS STATE BANK OF INDIA DEPOSITERS People makes deposits People repay Loans with interest People take loans People makes withdrawals and interest

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CREDIT Credit (loans) refers to an agreement in which the lender supplies the borrower with money , goods or services in return for the promise of future payment. Works of credit Credit plays vital and positive role in development. Credit pushes the borrower into a situation from which recovery is very painful

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Evaluation 1)What is barter system? Mention any three limitation of Barter System. 2) How does Money solve the Problems of double co-incidence of wants explain with examples. 3) How do Banks mediate between those who have surplus money and those who need money. 4) Analyze the role of credit for development?