why do we hold money ? The pre- keynesian economists opined that money is basically a barren asset and will not yield any interest when kept idle .therefore they concluded that all the money pumped into the the scale , the speed and ariety of economy must be held by the public (and also Banks) and the money is meant for undertaking transaction ie in a predomintlya cash economy and our country is one where many people are poor people do keep cash to buy many things.Money held for buying things is called transaction demand for cash-.
Then what is transaction?.
This is a basic concept.We must bring the concept of market and buyers and sellers.Here I can give a lengthy poem written by R A MUNDELL on goods and market I think i hae already put that in my blog earlier and try to locate it .All of you know there are many markets ranging from fish to flower and a wide range of economic activities take place in a variety of markets.Buyers and sellers giggle and bargain for a better price..The price signals what to produce and where to produce and transport cost and the type of taxation ruling in a country also matters most while talking about transactions.Market is not merely a geographic location but connected by a network of institutions and individuals and the market is now more international than domestic.Earlier the domestic demand used to determine the supply but now the whole indigenous production machinery is geared keeping into account both national and foreign demand.Even when business is basically domestic many develpments overseas do affect us .
therefore the scale, the speed and the variety of transactions that take place in the real economy eventually determines the economic health of the country .In the circular flow of production process we do import raw materials semi processed goods and final goods from other countries and likewise others also buy from us.
So money is a medium of exchange oiling the wheels of exchange like a lubricant...this simply means there must be enough quantity of money in circulation to facilitate exchange in so many markets ;otherwise for want of money the real economy will suffer..We started with the question why do we hold money but in the process we did explain some other related macro aspects of the market and about exports imports and taxes in a rudimentary way .Now imagine when Mr Modi removed nearly 85% of money supply at one stroke without having any sensible strategy to replace by new notes how much the real economy would have bleed ed and suffered?
Then what is transaction?.
This is a basic concept.We must bring the concept of market and buyers and sellers.Here I can give a lengthy poem written by R A MUNDELL on goods and market I think i hae already put that in my blog earlier and try to locate it .All of you know there are many markets ranging from fish to flower and a wide range of economic activities take place in a variety of markets.Buyers and sellers giggle and bargain for a better price..The price signals what to produce and where to produce and transport cost and the type of taxation ruling in a country also matters most while talking about transactions.Market is not merely a geographic location but connected by a network of institutions and individuals and the market is now more international than domestic.Earlier the domestic demand used to determine the supply but now the whole indigenous production machinery is geared keeping into account both national and foreign demand.Even when business is basically domestic many develpments overseas do affect us .
therefore the scale, the speed and the variety of transactions that take place in the real economy eventually determines the economic health of the country .In the circular flow of production process we do import raw materials semi processed goods and final goods from other countries and likewise others also buy from us.
So money is a medium of exchange oiling the wheels of exchange like a lubricant...this simply means there must be enough quantity of money in circulation to facilitate exchange in so many markets ;otherwise for want of money the real economy will suffer..We started with the question why do we hold money but in the process we did explain some other related macro aspects of the market and about exports imports and taxes in a rudimentary way .Now imagine when Mr Modi removed nearly 85% of money supply at one stroke without having any sensible strategy to replace by new notes how much the real economy would have bleed ed and suffered?
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