Concept of value of money

Concept of value of money

Meaning

By the term”value of money” we mean the purchasing power of money or its buying capacity. It refers to the number of goods and services which a unit of money can buy.The larger the amount of goods and services money can purchase, the greater will be the value of money, and vice versa. According to Crowther,” the value of money is what it will buy.”

According to Robert Son, the value of money means ” the amount of things general which will be given in exchange for a unit of money.” In the other words of Keynes, ” Money, as such has no utility except what is derived from its exchanges value, that is to say, from the utility of the things which it can busy.”

Value of Money and Price level

The concept of money is closely related to the prices of goods and services. Since, money itself is used as a unit of account and as a measure of value of all other things, its own value can be seen only through the prices of other things. The value of money thus depends upon the prices of goods and services to be purchased with money.The higher the price level, the smaller will be the purchasing power of money and the lower will be the value of money; the lower the price level, the greater will be the purchasing power of money and the higher will be the value of money.Hence, there exists an inverse relationship between the value of money ( or the purchasing power of money) and the price level. According to Irving Fisher, ” The purchasing power of money is the reciprocal of the level of prices so that the study of the purchasing power of money  is identical which the study of price level”. Symbolically, the value of money (V) is expressed as the reciprocal of the general price level (P), i.e. Vm= I/P. The general price level with which value of money is related is a mere abstraction. An individual, at a particular time, is not concerned with the general price level, but concerned with the prices of goods and services, which he wants to purchase. Thus, he is required to know the value of money in terms of goods only. Therefore, the value of money is a relative concept which changes from person to person depending upon the types of goods on which the money is spent. Crowther has aptly said that ” the value of money without qualifications is almost meaningless.”

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