THE VALUE OF MONEY. The value of money is defined as the quantity of goods and services which a given amount of money can buy. In other words, the value of money refers to the purchasing power of money.
When a certain amount of money can buy fewer goods and services, this will mean that the value of money has fallen and this can only happen when there is rise in prices. But if a given amount has risen, and this can only happen when there is a fall in prices such as when a N50 note can purchase 20cups of beans instead of 10, this means there is an increase in the value of money.
FACTORS THAT DETERMINE THE VALUE OF MONEY
(1) The price level: The value of money varies with the price level. If the price level increases, this would mean that a given sum of money would buy fewer g: and services. The value of therefore falls with an increase in the: level. Note that a falls in price leads to an increase in the value of money.
(2) The supply of money and its of or velocity in circulation: When a d quantity of money in circulation inc while there is little or no corresponding increase in the available quantity of goods and services, this would mean that a larger quantity of money would purchase fever commodities.
The value of money would therefore be low. The velocity circulation of money refers to the: at which money circulates wit economy by changing from one hand to another. When there is an increase: velocity of circulation of money, prices increases, leading to a lowering: value of money.
(3) Inflation and deflation: It is generally known that the value of money reduces during the period of inflation while value increases during deflation.
(4) Volume of goods and services level of production determines the volume of goods and service in an economy. When more goods and service available while the supply of money remains constant, the value of me increase. This is due to the fact that more commodities can be purchased given sum of money
MEASUREMENT OF VALUE OF MONEY
The value of money as well as the nation’s cost of living is measured by the use of price index, which is also called index of retail prices. A price index is a weighted average of prices and is expressed as a percentage of prices existing in a base year. As discussed earlier, the value of money is inversely related to price level.
what is an index number?
An index number if defined as a single number which measures changes in prices of goods and prices over a given period of time.
The price index number can be determined by illustrating with different items, namely Bournvita and sugar. The prices of the two items in 2012 are taken as the base year and the prices of 2013 as the current year.
By definition:
Price in the current year
Price index = Price in the previous year
and the value is expressed as a percentage by multiplying by 100%;
thus,
- Price index of Bourvita =
Price in the current year (2013 price)
Price in the previous year (2012 price) x 100%
- Price index of sugar = 2013 price
2012 price x 100%
Example
Assuming that price of a packet of sugar was 620.00 in 2012 but rose to 630.00 in 2013. Calculate the index number
Solution
Price in 2013
Index number = price in 2012 x 10%
= 30 x 100 = 150
20 1
From the calculation, assuming the index of the base year is taken to be 100, it then means that the index rose from 100 to 150. It equally means that the price of a packet of sugar rose by 5% between 2012 and 2013. It can also be concluded from the above calculation that the value of money fell by 5% between 2012 to 2013. Thus the cost of living rose in that period.
The significance of the price index is that it is used to compare the rise in the cost of living between any chosen period of time.
- demand and supply
- types of demand curve and used
- advertising industry
- factors of production
- entrepreneur
- joint stock company
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- Decision making: The entrepreneur takes decision during production process. He may take decision on what to produce, quantity to produce, what to supply and at what price to sell. Good decisions taken will bring out good results.
- Provision of capital: The entrepreneur is responsible for the provision of capital for business. The availability of enough capital will determine the level of success of the business. His capital may include physical cash, motor vehicles, building, plants and machinery.
- Risk bearing: the entrepreneur bears the risk associated with the business. Lots of risks are involved in all business set up, e.g. stealing, bad weather and fire. When his goods are in high demand, he makes profit but when the reserve is the case, he suffers losses.
- Efficient management: The entrepreneurs also ensure efficient management of the business by combining the other to maximize production and profits.
- Effective organization: the entrepreneur also ensures an affective organization in the business. He ensures that he has qualified personnel and assigns duties to them. He supervises them to ensure affective operations in the business.
