Characteristics of Money and Inflation & Deflation

Characteristics of Money

In simple terms, money refers to the currency that consists of notes and coins. However, in economics, money is taken in a broader sense.

Money is anything that is generally acceptable as a medium of exchange, common measure, store of value, transfer of value, etc. It is a means of payment, a unit of account or standard of deferred payments.

There are several characteristics of money. They are briefly described below.

1. General Acceptability:

Money is generally acceptable by everyone. For something to serve as the money, it must be generally accepted by everyone as a medium of exchange or store of the value.

2. Durability:

Money should not be easily damaged or lost in terms of its value or quality easily over time. Paper money is less durable than metal money but they are money as they are issued by law.

3. Recognisability:

Good money or money should be easily recognized by the users after looking or touch.

4. Homogeneity:

The unit of any given money should be identical to another unit of the same denomination, in shape, size, color and weight.

5. Portability:

Money can be easily carried from one place to another and also should contain a range value in small bulk.

6. Divisibility:

The money should be divisible or fractionalized into smaller forms to facilitate settlement of debts and exchange of varied sizes.

7. Stability:

The money is used as a measure of value and also used as the means of deferred payment. It also should be stable.

Inflation

Inflation is defined as the sustained or continuous rise in the general price level of the goods and services in the economy. It is the rapid increase in the general price level, that causes decline in the purchasing power of money. Inflation is statistically measured in terms of percentage increase in the price index per unit of time.

According to Crowther, 'It is a state in which the value of money is falling."

In words of A.C. Pigou, "Inflation takes place when money income is expanding relatively to the output of work done by the productive agents for whom it is the payment."

According to Coulborn, "Inflation is too much money chasing few goods."

Causes of inflation

Too much money for a few goods is the main reason for inflation. There are mainly two causes of inflation. They are briefly explained below:

1. Demand-pull inflation

If inflation arises due to excess in demand for goods and services over the limited quantity supplied, it is called demand-pull inflation. The increase in the general price level of goods and the services in the economy due to excess demand is known as demand-pull inflation.

The factors determining the demand-pull inflation can be summarized as:

1. The increase in population.
2. The increase in disposable income.
3. An increase in public expenditure.
4. The increase in money supply and bank credit.
5. Decrease in rate of interest in the economy.
6. Increase in the circulation of illegal money.

2. Cost-push inflation

The process of increase in the general price level of the goods and services in the economy due to the increase in costs of the production is known as cost-push inflation. If the inflation arises due to the increase in the cost of production, then it is known as the cost-push inflation.

The causes of cost-pull inflation can be stated as:

1. The increase in the wages and salary.
2. The increase in the profit margin by the producer.
3. The increase in the rate of indirect tax.
4. Shortage of the basic raw materials.
5. The increase in the factor costs by government.

Deflation

Deflation is defined as the sustained or continuous fall in the general price level of the goods and services in the economy. When the price decreases, the value of money or the purchasing power of money increases, and it causes deflation.

Deflation is that state of the economy where the value of the money is rising or the prices are falling.

It is worse than the inflation because it may discourage producers and investors and reduces employment.

According to Prof Paul Einzing, "Deflation is a state of disequilibrium in which a contraction of purchasing power tends to cause, or is the effect of a decline in the price level."

In the word of A.C. Pigou, "Deflation is the state of falling prices which occurs at that time when the output of goods and services increases more rapidly than the volume of money income in the economy."

According to Crowther, "Deflation is the state of the economy where the value of money is rising or the prices are falling."

Causes of Deflation:

1. Rapid increase in the industrial and agricultural production.
2. Decrease in wages and salary.
3. Control of the credit by the central bank.
4. Decrease in the money supply by the central bank.

(Jha, Bhusal and Bista)(Karna, Khanal, and Chaulagain)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.