Role and Importance of Money in Modern Economy
In modern economics, money has been considered as the most dynamic element in the economy as well as a link between the present and the future. It influences not only the level of prices but also the cyclical behavior of consumption, savings, investment and employment. In the modern approach towards money the stability of money is no longer taken for granted, yet the stabilization of the value of money is brought into direct relation with the stabilization of the levels of income and employment. A well-conceived and well-executed monetary policy is, therefore, considered as an essential pre-requisite for the stable and efficient working of the national economy. economy.
Money in Economic Life: Money plays an important role in the shaping of the economic life in a country. Money is characteristic of nearly highly developed civilization, and we might almost say that it i t is necessary to such developed. # Money is Economic Welfare: W elfare:
The primary social goals for a welfare evaluation of the operation of an economic system might be maximum freedom of choice for individual distribution of income, and optimum standards of living for all individuals as determined by their preferences and restricted only by available resources and technology. It is obvious that the goals of a welfare economy can be achieved only in a money economy. Money helps the producers and the consumers to spend their resources with some degree of rationality. I t also gives them freedom of choice on production and consumption. Money has facilitated achieving high production and employment and wide distribution of benefits at any one time. It is true that the existence of such factors alone does not guarantee economic welfare, but their absence makes it difficult to achieve the goals of economic welfare.
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# Money as a link between the Present and the Future:
The present and the future is the system of forward and future price on the organized exchanges. All prices, in fact, even present prices of securities and commodities are links between the present and the future, because they embody and reflect the anticipations of buyers and sellers respecting the future. Money serves as a link between the present and the future when it functions as a standard of deferred payments. For the value received in the present, payments are made in the future. # Money in the Capitalist Economy:
In a capitalist economy the consumer is free to choose what goods to buy and how much to buy. Normally he will choose those products which yield the greatest utility relative to their price. Apart from the consumers individual tastes and circumstances, his choice of purchases will depend upon (1) his total money income; ( 2) the part of his income which he prefers to spend on consumers goods; (3) the price of the goods and services which he actually purchases; and (4) the process of other goods and services. # Money in the Socialist Economy:
In a social economy, price tags are essential for its smooth efficient and economical working. It is said while money is a master in a capitalist economy. It is a servant in a socialist economy. Some socialist writers argue that where the entire economic activity is planned, controlled executed by the State is no necessity of the pricing process and the use of money can be dispensed with altogether. When the Bolsheviks (Russian communists) seized power after the October Revolution in 1917, extensive direct requisition and free distribution of goods where conducted by the Government, which hoped to effect a transition to a natural economy in which purchase and sale, 2
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and the medium with which they were carried out
i.e.
money-would have
no place. However, the Bolsheviks soon realized that they were mistaken in their belief and that the use of money was inevitable even is a planned socialist economy. In October 1921, Lenin clearly admitted that even the initial stage of Communism could not be achieved without proper calculation and control. Trotsky also admitted, The blueprints produced by the offices must demonstrate their economic expediency through commercial calculation. Without a firm monetary unit, commercial accounting can only increase the chaos. In Soviet Russia, the Supreme Economic Council prepared two types of plans: (i) the production plan, and (ii) the financial plan. The former was prepared in physical terms; and the latter in terms of money which served as a guide to prices, taxes, government loan policies, etc. The pattern, the volume and the technique of production were determined and controlled by the state and not by the price system. However, production and income transaction were carried on by means of money. Wages and salaries were paid in money which the recipients were free to spend on whatever products were available. The transactions between different production units were carried on in money mainly through deposits with banks. # Circular Flow of Money:
A continuous circular flow of money payments is the main characteristic of modern economic life. It can be described in terms of a circular flow of incomes and expenditure in the economy. In the process of circular flow, some money gets to the government in the form of taxes but this too flows back to the society in the form of public expenditure. Public authorities also enter the capital market both as savers as well as borrowers.
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# Money in a Developing Economy:
A developing economy is one where people are beginning to utilize available resources in order to bring about a sustained increase in production of goods and services. It can be stated in general terms that economic development controls (a) a rise in per capital income through time; (b) a gradual transformation of the subsistence sector, which is a distinguishing feature of an underdeveloped economy , into monetized sector, and (c) increasing institutionalization of saving and investment. Each one of these aspects has a direct relationship with the use of money in a growing economy. So, we can see that, money is a powerful instrument for capital formation and economic development in a developing economy.
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