MONEY AND NEAR MONEY TYPES OF MONEY BY: MV

1. MONEY AND NEAR MONEY
By: Vidhi(514) and Muskan(581)

2.  Crowther defines money as “anything that
is generally acceptable as a means of
exchange and at the same time acts as a
measure and store of value”.
DEFINITION OF MONEY

3. TYPES OF MONEY
1. METALLIC MONEY 2.PAPER MONEY 3.CREDIT MONEY
 money made up of
metal.
 Eg : Gold, Silver,
Copper.
Types :
1. Standard money
2.Token money
 Money made up of
paper.
 consist of currency
note issued by govt. or
the central bank of the
country.
Types:
1. Representative
money
2.Convertible money
3.Inconvertible
money
4.Fiat money
It refers to a future
monetary claim against
an individual .
Forms:
1.Bonds
2.Money market
Eg: bank
deposits,credit
card loans.

4. NEAR MONEY
Near money refers to all those assets which posses many of the
characteristics of money, have high degree of liquidity and can
inexpensively be converted into money . There are assets which
cannot be technically regarded as money and perform some
functions of money . Near money cannot be directly used for making
transactions. They must be converted into money proper before
spending. Near money assets are highly liquid but are not as liquid
as the money is. Some examples of near money are bills of
exchange, bonds, debentures, shares etc.

5. ‘Nearness’ of near-money
depends on the degree of liquidity
of the near money assets. Liquidity
refers to the ease with which an
asset ,or security , can be
converted into ready cash without
affecting its market price on short
notice and with minimum cost.
Cash is the most liquid of assets
like tangible items unless liquid.
Greater the liquidity, more near an
asset is to money and vice versa.
Overall liquidity of an economy
depends upon the composition of
the total stock because different
assets carry different degrees of
liquidity.
For example, (A) coins,currency
notes and demand deposits
represent first grade liquidity ; (B)
time deposits, treasury bills, Govt
securities, saving loans etc.
represent second grade liquidity ;
(C) other assets like deposits of
building socities,financial claims of
hire purchase companies etc.
represent third grade liquidity.

6. ESTIMATION OF DEGREE OF LIQUIDITY OF ASSETS
ESTIMATION OF DEGREE OF LIQUIDITY OF ASSETS
>The given figure shows the distinction between
money and near money in terms of interest earnings
of an asset.
>An asset which earns interest rate is not money
and thus is near money and vice –versa.
>The degree of liquidity of an asset can be known
by the difference between marker rate of interest (MR)
and the actual rate of interest (AR).
>Given the (MR), the higher the (AR),the lower is the degree of
moneyness of an asset and vice-versa.
> Figure 1 and table 1 exhibit this relationship between the (AR)
and the degree of liquidity.

7. MR (%) AR(%) DEGREE OF
MONEYNESS
10 0 Full bodied
money
(100% liquidity)
10 2 Highest (80% liquidity)
10 4 Moderate (40% liquidity)
10 8 Lowest (20% liquidity)
10 10 No moneyness ( zero liquidity)
Market rate of interest (MR) being given (10%) there can be different rates of
interest earned by different assets such as 2%,4% and 8%. The degree of
moneyness is the highest (OM1 or 80%) in the asset which bears the lowest rate of
interest (AR=2%) ; and degree of moneyness is the lowest ( OM3 or 20%) in the
asset which bears the highest rate of interest. An asset earning AR=4% as
moderate degree of liquidity. If an asset bear 0 rate of interest it is a full bodied
money with 100% liquidity. IF THE RATE OF INTEREST IS EQUAL TO THE
MARKET RATE OF INTEREST AR=MR=100% THE DEGREE OF LIQUIDITY OF
THE ASSET BECOMES ZERO

8. 1. BILLS OF EXCHANGE : It is a promise to pay a specified sum of money on a
specified date generally after three months or ninety days. It may be treasury bill
or commercial bills or financial bills.
A. Commercial bill – Drawn in connection with the commercial transactions.
B. Treasury bill – Are the finance bills through which the government raises short
period funds.
C. Finance bill – Drawn when a person lends money to other person
TYPES OF NEAR MONEY

9. 2. BONDS: An instrument of borrowing for relatively long periods . It is a
promise to pay a fixed sum of money by way of interest annualy for a
specified number of years and to repay the capital sum at the end of the
period. This method of borrowing is adopted by the government and the
industrial units. Bonds issued by the firms are known as debentures .
Bonds issued by the government without a maturity date with interest
payable for the indefinite period are called irredeemable bonds or
consols or perpetuties .

10. 3.EQUITY SHARES : Equity shares offer their owners a claim to a share in
the profits of the firm declared as dividend. They are marketable in the
stock exchange. Bonds and debentures also are transacted in the stock
exchange, but the bills of exchange operate in the money market.

11. 4. OTHER NEAR MONEY ASSETS : Besides bill of exchange ,
bonds,equity shares there are a large number of financial assets which
can be considered as near money . They are time deposits and saving
deposits with commercial bank ; banker’s acceptances ;cash surrender
values of line insurance policies ; repurchasable shares in savings and
loan associations ; deposits of building societies ; traveller’s cheque ;
postal saving deposits ; saving in units of unit trust etc.

12. DISTINCTION BETWEEN MONEY AND NEAR MONEY
BASIS MONEY NEAR MONEY
1. DEFINATION It consists of coins,currency
notes and demand deposits
of the banks.
It includes the financial
assets , like time deposits,
bills of exchange , bonds ,
shares etc.
2.LIQUIDITY It possesses 100% liquidity
i.e it is perfectly liquid or
can be readily acceptable as
a means of payment .
It lacks 100% liquidity i.e it
involves time cost for its
conversion into money
3.FUNCTION It serves as a unit of
account for a common
measure of value. All prices
are expressed in terms of
money
It does not perform such
function rather , its own
value is expressed in terms
of money.
4. USE IN TRANSACTIONS It is directly used for making
transactions.
It is an indirect medium of
exchange .
5. INCOME YIELDING
QUALITY
It is not an income yielding
asset
They are income yeilding
assets.

13. SIMILARITIES BETWEEN MONEY AND NEAR-MONEY
(1)
• Both money and near money are claims. Coins and currency are a
claim over the govt. and central bank. Bank money is a claim over the
bank in which deposits are held. Near money assets are claim over
their respective parties or institutions.
(2)
• Money is not qualitatively different from near-money. Liquidity is the
common attribute of both money and near-money . They differ only in
terms of degree of liquidity.
(3)
• Both money and near-money act as a store of value . But, near-money
assets are preferred because they yield income along with being a
store of value.

14. 1.BROADER DEFINITION OF MONEY: The modern concept of money is based on
the liquidity approach, as compared to the traditional approach depending upon
the transactions approach. In the transactions approach money includes only
legal tender money and bank money whereas in the liquidity approach it
includes (a) legal tender money (b) bank money (c) near money i.e , all
those financial assets which can be easily and inexpensively convert it into
money proper within a short period of time.
2. INCREASE IN VELOCITY OF MONEY : Near- money influences the velocity of
money . A person’s ability to spend depends not only on the amount of money
he has with him and he holds in the bank ( legal money and bank money) , but
also on his ability to raise additional funds by selling his near- money assets .
The existence of near money increases the velocity of money (V) and hence
aggregate demand (MV) in the economy by activating idle demand deposits and
currency.
SIGNIFICANCE OF NEAR- MONEY

15. 3. POLICY IMPLICATIONS : Near-money has important policy implications for the
monetary authorities. The prevalence of near-money assets significantly
increases the overall level of liquidity and hence the level of aggregate
expenditure . The monetary authority which aims at influencing the level of
aggregate expenditure by controlling the money supply alone will fail to achieve
its objective. For the monetary policy to be effective, it must influence not only
the total stock of money in the economy, but also the total stock of near-money
assets.
SIGNIFICANCE OF NEAR-MONEY
Broader
definition of
money
Increase in
Velocity of
Money
Policy
implication

16. QUALITIES OF GOOD MONEY
MATERIAL
General
acceptabili
ty
portability
Durabilit
y
Divisibilit
y
homogeneit
y
Cognisabilit
y
Stability
Mallea
bility

17. 1.GENERAL ACCEPTABILITY: The material of which money is made should be
acceptable to all without any hesitation. Gold and silver are considered as good
money material because they are readily acceptable to the general public.
2. PORTABILITY: Money should be easily carried or transferred from one place to
another . Money material must have large value in small bulk.
3. DURABILITY: Money material must last for a long time without losing its value .
4. HOMOGENEITY : Money should be homogeneous . Its units should be identical ; they
should be of equal quality and physically indistinguishible.
5.COGNISABILITY : Money should be easily recognised .
6.STABILITY: The value of money should remain stable and should not change for a
long period of time .
7. DIVISIBILITY: Money material must be easily sub-divided to allow for the purchase of
smaller units of the commodities.
8. MALLEABILITY: The money material should be capable of being melted and put to
different forms.

18.  Monetary economy refers to the economic system in which
money is used as a medium of exchange . It is a
monetarised economy in which goods are exchanged
indirectly through money ; money purchases goods and
goods purchase money. It is the opposite of barter economy
where no money is employed and the exchange takes place
directly between goods and goods. In short, the use of
money converts a barter economy into a monetary
economy.
MONETARY ECONOMY

19. FEATURES OF MONETARY ECONOMY
1.USE OF MONEY
Monetary economy employes money to
perform the following function:
a. Money is generally accepted as a
medium of exchange .
b. All payments are made in terms of
money.
c. It serves as a unit of account or a
numeric or a measure of value
d. It functions as a standard of deferred
payments.
e. It facilitates the transfer of value from
one place to another.
2.MONEY AS AN ASSET
In a monetary economy individuals
also use money as an asset . Like
other assets wealth can be stored in
the form of money . It is considered
as an asset because it is the
permanent abode of purchasing
power i.e it is a claim against all
goods and services which an
individual desires to have .

20. 3. GREATER LIQUIDITY
4.EXISTENCE OF FINANCIAL
INSTITUTIONS
Monetary economy has greater
liquidity than the barter economy
has. Money is the most liquid
asset and is used as a link
between the present and the
future in a monetary economy .
Such a link is absent in the barter
system.
Financial institutions such a
central bank, commercial banks
and other financial institutions
exist in monetary economy unlike
in barter system. These
institutions deal with a variety of
non-cash financial assets or near-
money assets..Thus, in monetary
economy, besides money a
number of near-money assets are
also created and widely used.

21. 5.EFFICIENT EXCHANGE SYSTEM 6.MARKET MECHANISM
As compared to the barter system
exchange activities are performed
more efficiently and more
conveniently in a monetary
economy. All the difficulties and
inconveniences of barter system ,
such as the problem of double
coincidence of wants , divisibility ,
storing wealth, common measure
, deferred payments,
transportation etc. are eliminated
in a monetary economy.
As against barter system , market
mechanism operates in a market
economy because of the use of
money. In market mechanism, the
forces of demand and supply
interact with prices. Prices, which
indicates the relative importance
of various goods and services are
expressed in terms of
money.Thus the use of money is
essential for a working market
mechanism.

22. 7.INTERACTION B/W MONETARY
AND REAL FACTORS
8.STAGE OF ECONOMIC
DEVELOPMENT
As opposed to the barter
economy, there is circular flow of
money corresponding to the
circular flow of real transactions in
a monetary economy. In the
circular flow of real transactions,
factor services flow from
household to the firm and goods
and services flow from firms to
households. In the circular flow of
money , money flows from firms
to households and from
households to the firms.
Monetary economy is relatively
advanced economy as compared
to the barter economy. In the
barter economy, economic
activities (production and trade)
are at a low and subsistence level
and there is economic
backwardness. Where as, in the
monetary economy because of
the extensive use of money,
division of labour takes place ,
technology develops, production
increases, trade expands and
there is economic development.

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