Gold Standard

Gold Standards

Country is said to have gold standard when gold the standard of value or when gold is the basis of all currency. There are four types of gold standard.
Gold Currency Standard
This is the oldest type of gold standard and is called full gold standard. A country is said to be full gold standard when gold serves not only as a standard of value but also circulates as coins. Britain, U.S.A, France, Germany and other European countries had this type of gold standard before 1914.
Gold Bullion Standard
Under this system the value of the currency is fixed in terms of gold by making such currency convertible in to gold (bullion, not coins). Gold does not circulate as coins. The countries where this system prevailed gold may move freely into or outside the country. No gold coins circulated. The idea was to make it available only for foreign payments.
Gold Exchange Standard
It is the gold standard for making foreign payments only; inside the country the people use token coins and paper notes. For making foreign payments the external value of the home currency convertible in to gold and the currency authority of the home country is ever prepared to make available the foreign currency in exchange of home currency. When the home country’s nationals receive payment from abroad in the form of currencies convertible into gold the currency authority of the home country converts it into home currency.
Two reserves are kept to ensure the smooth working of this system. One reserve is kept in the form of home currency inside the country and another reserve is kept at a foreign center in gold. When the home country has to receive payments from abroad then gold or foreign currency convertible in to gold is paid in to the reserve kept at the foreign center and in exchange the international currency is issued from home reserve.
When payments have to be made abroad then the internal currency is paid to the currency authority with in the home country and is and is put in to the home reserve. The currency authority give in exchange gold out of the reserve kept at the foreign center.
One of the greatest defects of gold exchange standard is that it is too complicated. It is not automatic. It requires unnecessary duplication of reserves.
Gold Parity Standard
It is latest to enter the gold standard. It is the type, which prevails under the aegis of IMF. In this system the internal currency consist largely of notes and some form of metallic coins but not of gold, nor these notes are convertible in to gold coins, gold bullions a foreign currency based on gold. But the only respect that gold comes in to play under this system is that the currency authority takes upon itself, the obligation of maintaining the exchange rate of the domestic currency stable in terms of certain quantity of gold. This is the type of gold standard, which the member countries of the IMF are supposed to have.

Advantages of Gold Standard

1. It is an objective system and is not subject to changing policies of the government or the currency authority.
2. It enables the country to maintain the purchasing power of its currency for a very large time.
3. It preserves and maintains the external value of the currency (rate of exchange) within narrow limits. It provide fixed exchanges which is great bourn to traders and investors.
4. It gives the advantages of an international foreign currency. It creates an international measure of value.
5. It inspires confidence and contributes to national prestige.

Market

In ordinary language market means a place where things are bought and sold, but in Economics the market does not mean a particular place or bazar, it only means a commodity and a group of buyers and sellers of the same. Thus we speak of cotton market or share market etc. Same are willing to buy and others are willing to sell. The buyers and sellers can with one another by verbal, by letter, telephone, internet etc but place does not matter.
Classification of Market
Categories of market are:
1. Perfect market
2. Imperfect market
Again categories are classified into:
Market on the Basis of Time
On the basis of time market could be classified into the following kinds:
1. Day–to-Day Market
This type of market is concerned with goods that are perishable like milk, fish, vegetable, fruits etc. The price in this market is determined by the demand of the market. If the demand expands the period is short that the supply can’t be increased immediately at all, therefore the price will increase similarly if demand decrease the time is so short that the surplus supply can’t be stored due to the perishability of the goods, obviously the price will decrease.
2. Short Period Market
It is the market when time allows supply to adjust with the demand of the market to the extent of available size of the firm or producing units. For example: If market demand is so goods per day and particular firm of the same goods could produce max: 100 units by using its full production capacity .If demand increases from 50 to 75 units the firm can supply utilising the unused capacity, but if demand becomes 120 it can’t be satisfied by existing production capacity because total size of firm is 100 units per day.
3. Long Period Market
When the period is so long that the supply can adjust with the demand of the market by changing the size of the firm. If the demand of the market increases immediately the prices will also increase. This increase of price will expand the margin of profits of the producers therefore the firm can increase the production through employing more labor, more machines , raw material etc. By increasing supply reduces the increased prices and they come again on the previous point. Similarly if demand falls the price also decrease and producers curtail their production due to decrease in margin of profits. As consequence of curtail in production the depressed price goes up again on the previous point.
Market on the Basis of Location
Markets can be classified on the basis of location.
1. Local Market
If the goods are sold and purchased in a limited area is called local market. For example: If the goods produced in Karachi are sold in Landhi or Malir, it will be the example of local market. Local market generally is concerned with the perishable good like milk, fish, bricks etc.
2. National Market
This is the kind of the market which covers the whole of the country. For example: the textiles of Karachi are sold in all the four provinces of Pakistan. Similarly sports goods produced in Sialkot are supplied in whole the country.
3. International Market
When the goods produced locally are sold in all the countries of the world is called International market. For example: the cars produced in Japan are sold in whole of the world. The buyers and sellers from all over the world compete with one another therefore prices are influenced by the world environment.
Market on the Basis of Nature of Goods
1. General Market
Market is said to be general where not a specific but general goods are sold and purchased. For example: if cloth, pots, shoes, vegetable, fruit are sold at a time it will be called general market.
2. Specialised Market
In this market special or specific goods are brought to sale in this kind of the market. For example: grains are sold in grain market similarly fruits are sold and purchased in fruit market. These markets provide facility to the buyers that they could purchase goods of their

Barter System

Introduction

Barter economy means the exchange of commodities. It consists if a bargain of commodity with the other with out the help of another of exchange, such as money. Therefore we can say that buying goods against goods is called barter system.
The barter system can easily be understood with the help of the following example. Suppose Mr. A is a farmer and produces wheat in his fields. When the crop is ready A finds that he can stock as much wheat as his family need for the whole year and still he will have a surplus which he can use for exchange purpose. Now he has to get his plough repaired through a carpenter. After availing the services of the carpenter, Mr. A makes him the payment in the form of wheat in exchange of his services. Again Mr. A wants to purchase cloth and goes to merchant’s shop. Here he exchanges the desired quantity of cloth with surplus wheat. Thus the process will keep on continuing and the needs and wants will be satisfied by making use of any commodity as the medium of exchange.

Defects of Barter System

Following are some of the difficulties of the barter system.
1. Double Coincidence of Wants
Barter requires a double coincidence of wants. If a person for insistence has wheat and wants to exchange it with cotton, he has to find a person possessing cotton and requiring wheat. It was possible only when the people lived in small areas and their wants were too limited.
2. Lack of Common Measures
There was no fixed measure in which two things could be exchanged. It means every one did not derive complete satisfaction out of his deal. The ratios of exchange were fixed accordingly to the necessities and demands of the parties. One party had to suffer under these conditions were each transaction is an isolated transaction.
3. Lack of Divisibility
Another great disadvantage of barter system was the lack of divisibility. Suppose a man possess horse and requires wheat and cotton in exchange but both of these commodities may not be obtained from one man. One person may have wheat another has rice in surplus and both of them want to exchange their commodities with the horse. Now the horse cannot be divided and fence the transaction may not be completed.
4. Lack of Store of Value
Under the barter system wealth consisted of non-durable goods, which are quickly perished or detoriated with the passage of time. There value may not be stored for long period. Hence no body could think of storing something to provide against future.
5. Inconvenient Media of Exchange
Commodities like little wheat or other things alike cannot be easily transported and thus have little value. Therefore under barter system the mediums of exchange were really inconvenient.

How Money Removed The Difficulties of Barter

With the help of money it has now become possible to over come the inconveniences of barter system.
1. Standard of Value
Under the system of exchange i.e. sales and purchase the value of each commodity is expressed in terms of standard of value such as gold or silver.
2. No need of Double Coincidence
Under monitory economy there is no such need of such two persons whose surplus suits with each other wants.
3. Sub-Division of Articles is Not Necessary
Money has solved the difficult of sub-divisibility of some of the commodities with out any loss. Under this system if any one needs urgent cash and has some valuable he can simply sell it in the market and get the desired money.
4. Store of Value
Money has provided man an opportunity to save money in the form of liquid cash that helps him to preserve his assets for a longer period of time and avoid any unseen stringencies.
5. Large-scale Production
Large scale of production is possible by the use of money, which was not possible under barter economy.
Summing Up
Thus money or sale and purchase system has removed all the difficulties of barter economy.

Money

Definition of Money

Definition
“Money is some thing, which has general acceptability in the settlement of debt, or in transfer of ownership of goods and services in a country. The value of exchange of every thing in a country is expressed in terms of money.”

Mr. Robertson defines money in the following words
“Money is a commodity which is widely accepted in payment of goods or in discharge of other kinds of business obligation”.

An English economist Mr. Hawtrey observes that
“Money is one of those concepts which are definable primarily by the use or the purpose which they serve”.
In the words of Goh Cole,
“Money is purchasing power some thing that buys things”
According to Ely,
“Any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts”.

One of the simplest definitions of money is given by Mr. Walker who says that
“Money is what money does”.
In the light of the above definitions, it can be said that
“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.

Functions of Money

Money is said to perform the following functions
1. It serves as a medium of exchange.
2. It is used as a store of value.
3. It acts as an instrument of deferred payment.
4. It is a measure of value.
These are further discussed below
1. Medium of Exchange
The most general function of money is that it serves as a medium of exchange. The ownership in goods and services is exchanged through it. Money is accepted in exchange of goods and services and property rights simply because in its turn money can be exchanged for them at such places and times the possessor wishes. It means any thing can be brought and sold through it. Money acquires the capacity of serving as a medium of exchange also because of legal sanctions behind it and as such it is generally accepted in the settlements of debts or any financial transaction.
2. Measure of value
Money is used as a measure of value in the sense that the value of every thing is demanded in terms of money. As a measure of value money not only facilitates business transactions but is also useful transacting the sale and purchase if immovable properties buying at distant places. Money as a measure of value is also helpful in asserting the financial worth or stability of a business unit or an industrial concern which is possible from the study of their balance sheets containing the value of their assets and liabilities in terms of money. In simple words we can say that function of money as a measure of value helps us almost in every aspect of our daily life.
3. Store of Value
Another function of money is that it serves as a store of value. We can keep our assets in liquid form so that they can be used any time we feel of doing so. A unique feature of our daily life is that the flow of income does not correspond with the expenditure. The income in the majority of cases does not come to us with the same intervals as we have to make payments and consequently their adjustment would have been difficult but money, serving as a store of value makes a happy adjustment possible between the flow of income and expenditure intervals. Due to its value payments for the future can be made.
4. Instrument of Deferred Payment
Money also acts as an instrument of differed payment, which means that transactions requiring deferred payment are made possible through it. It so happens because the value of money having legal sanction behind, is more stable in comparison to other goods the value of which are liable to great fluctuation under the influence of their demand and supply position. The value of money being stable the parties in transaction are assured of getting the same value even after some time if the payments are made in terms of money. It means that money serving as an instrument of deferred payment facilitates credit transactions. Similarly for the same it encourages lending and borrowing which stimulate saving and investment and ultimately accelerates the economic growth of a country.
5. Transfer of Value
Money has simplified the process of transfer of value from one place to another with out losing its worth. Money is readily accepted by all without any difficulty. It is even possible to transfer a billion of rupees from one place to another.

Types of Money

Generally the classification of money is based on the material that is being used for the purpose. According to the material used, the money can be classified as:
1. Metallic Money
The currency in use or to be used when is made of some metal; it is known as metallic money. The metallic money usually consist of coins made up of gold, silver, copper, bronze etc. a characteristic of these coins is that they are properly shaped and stamped by the central issuing authority to prevent any misuse. In today’s modern age of business the coins are Marley used and issued. The metallic money is further classified as:
Classification of Metallic Money
Full Bodied Coin
Full bodied coin is the one, the face value of which is equal to the quantity of metal used in it. In this case the face value of the coins is equal to its intrinsic value.
Token Coins
A token coin or money is the one whose face value is higher than the value of the metal contained in it. It is usually as a subsidiary unit or coin. In token coin the face value is higher than the intrinsic value.
2. Paper Money
Paper currency refers to the currency notes issued or used in a country. These notes are made up of special kind of paper. Paper currency also includes notes (promissory) and cheques but they circulate as money only in the countries where they are used freely for settling business transactions such as U.S.A and U.K.
In early times when notes were introduced they were backed by an exactly equal amount in gold or silver kept by the issuing authority. Paper money is not wholly backed by some precious metal now. only a proportionate reserves are maintained and a good deal of the paper money rests on people’s of people’s confidence in the word of issuing authority generally the government or the central bank. Such a currency is also called fiduciary issue.
Classification of Paper Money
Paper money may be of following types
(i) Representative Paper Money
When the paper money is backed by an exactly equal amount of in gold or silver kept in reserve by the issuing authority it is known as representative money. Such notes could be exchanged for coins when needed and did nothing more then to represent coins.
(ii) Convertible Paper Money
The currency notes which can be exchanged for full bodied or standard coins is called convertible money. Its value is backed by a proportionate reserve of some precious metal and the confidence in the word of eh issuing authority. It is also called fiduciary money.
(iii) Inconvertible Paper Money
The currency notes that cannot be converted in full-bodied coins. The issuing authority gives no promise for its conversion. It can also be called fiat money.
Advantages of Paper Money
Following are some advantages of the paper money
1. Economical
Currency notes are cheapest media of exchange. Paper money practically costs nothing to the government. It does not need to spend anything on the purchase of gold for minting coins. Certain other expenditure or losses associated with metallic coins are also avoided.
2. Convenient
Paper money is the most convenient mean of money. A large amount can be carried conveniently in the pocket with out any body knowing about it. It possessed in very large measure the quality of portability, which a money material should have.
3. Homogenous
Among the coins there are good and bad coins. But currency notes are all exactly similar. It is therefore the substitute medium of exchange.
4. Stability
The value of money can be kept stable by properly regulating its issue. Managed proper currency method is therefore adopted by many countries.
5. Cheap Remittance
Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover.
6. Elasticity
Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency authority. Thus paper money can better meet the requirements of trade and industry.
7. Advantages to the Banks
Paper money is of great advantage to the banks. They can keep their cash reserves against liabilities in this form, for currency notes are full legal tender.
Disadvantages of Paper Money
Its disadvantages are as follows
1. No Value Outside the Country
Paper money is of no value outside the country where it is issued. Gold and silver coins were accepted even by foreigners as they had no intrinsic value.
2. Risk of Damage
There is always a possibility of damage to the paper. Fire may burn it, water may tear it etc.
3. Danger of Over Issue
A serious drawback in paper currency is the ease with which it can be issued. There is always a danger of its over issue when the government is in financial difficulties. Once this course is adapted the momentum leads to further notes printing until it losses all the value. This over issue of notes is called over inflation.
4. Price Increase
Some times especially when the money loses its value there is always an increase in the price of goods. As a result, labours and other people with fixed income suffer greatly. The whole public feels the pinch.
5. Effect on Business
During the days of monetary stringencies in a monetary economy, the business activities are affected very badly. The indirect result of price increase, shortage of currency etc, result in a fall of exports and a rise in imports. It leads to the export of gold from the country, which is not a desirable thing. Its balance of payments gets unfavourable.
3. Bank or Credit Money
Bank money consist of demand deposit, which is drawn by cheques. A deposit is like any other medium of exchange and being payable, on demand, serves as a standard of value or unit of an account as it is convertible into standard of value i.e. money or crash at fixed terms. In the words of J.M. Keynes.

“Bank money is simply an acknowledgment of a private debt expressed in the money of account which is used by passing from one hand to another as an alternative of money to settle transactions.”

Value of Money

The value of money refers to the purchasing power of one unit of money in terms of goods and services. It indicates the quantity of goods and services that can be had in exchange of one unit of money. If the value of money is studied in relation to the home market, it is called internal value as against external value, which gives the value of money in terms of foreign currency.
Value of Money and Price Level
The price level of a country refers to the value of goods and services in terms of money. It means that value of money is expressed in terms of money. As for example, one unit of money supposes fetches 3 seers of wheat and value of 3 seers of wheat is one unit of money. Suppose the value of money rises and its one unit now fetches 5 seers of wheat. It means that the value of wheat has come down and now 5 seers of wheat will fetch one unit of money, which previously only did 3 seers.
From the above example it is evident that value of money is followed by the fall in price level and vice versa. In other words rise in price level makes the value of money fall and the same quantity of money can be had with more units of money. The above fact can also be interpreted as an increase in the quantity of money brings a corresponding fall in the value of money and the fluctuations in the value of money occurs due to a change in the quantity of money. This relationship between value of money and its quantity is explained by quantity theory of money.

Quantity Theory of Money

Theory
The quantity of money states that other things remaining the same, the value of money falls in proportion to increase in the quantity of money in circulation. It mans that in the case, when the quantity of money increases by 25%, the value of money falls by 25%. Thus the quantity of money and its value of money are inversely related.
Explanation
The value of money like any other commodity is determined by its demand and supply. Thus the quantity theory of money can be explained under these two heads.
1. As Regards Demand of Money
Demand of money according to Fisher is the derived demand i.e. not for direct consumption. Money being a medium of exchange is demanded for the purchasing of goods and services. Demand for money therefore depends upon the demand for goods and services.
2. As Regards Supply of Money
According to Fisher supply of money is represented by the total expenditure made by the people calculated during a given period of time. The total expenditure made by the people is calculated by multiplying the total quantity of legal tender money by its velocity plus the bank money (cheque, drafts etc) multiplied by its velocity. Velocity of money means the number of hands that one unit of money changes during a given period of time. For example a RS 100 note changes 10 hands in a year, its velocity will therefore be 10. It means that total payment made by this note will be .
RS. 100 * 10 = RS. 1000
According to Fisher, supply of money is determined by the following equation.
MV + M‘V’
M represents the actual money and M’ the bank money where as V and V’ represent their respective velocities.
Demand for money is represented by price multiplied by turnover i.e. total quantity of goods and services sold and therefore demand is determined as:
Demand of money = P x T
Where P is the price and T is the turnover.
Since the value of money is determined at a point where its demand is equal to supply and accordingly Fisher gives the following equation of exchange:
PT = M‘V’ + MV
Or
P = (M‘V’ + MV)/T
According to the above definition / equation, the price level is determined by dividing the total supply of money by turnover.
Criticism
The quantity theory of money is theoretically convincing but practically it is consider as a misleading one.
1. The very assumption in the theory that other things remaining same are incorrect. Fisher assumed money as independent variable where as credit (M’) is a function of business activity i.e. the turnover. It means the turnover increases, the supply of bank or credit also increases and consequently money is not an independent variable.
2. Velocity of money and bank money has been assumed is assumed in this theory to be constant where as they are not so because they depend upon business activity which is never constant.
3. The theory fails to explain as to why during depression the increase in supply of money does not bring a corresponding increase in the price level.
4. According to quantity theory high price is the effect of increase in supply of money which is not always true. Scarcity of goods caused by a fall in production or increase in production with respect to an increase in population also raises the price level.
5. It is argued that Fisher’s equation is only valid in a static economy. The economy becomes static beyond full employment level because the physical production does not increase in such a situation. the extra money if introduced in such a stage of economy is not absorbed by increased quantity of output and consequently the price level is directly affected. This shows that Fisher equation in a dynamic economy is of no use.

Importance of Money

In order to have a comprehensive idea of the importance of money, we can classify it as.
1. Importance to individuals in their daily life.
2. Importance to an economy.
1. Importance to Individuals in their Daily Life
Importance to individuals in their daily life is well established under the following heads
i. Removal of Double Coincidence
Money has removed the problems of double coincidence of wants. An individual because of money is in position to exercise his choice and can purchase or consume a commodity according to their liking.
ii. Convenience in Buying and Selling
Money being a measure of value, an individual can sell his goods for money and purchase the goods he needs through it. The sale and purchase of goods is not confined to with in the borders of a country only, but are also conducted abroad.
iii. Ease in Planning
Money has given an opportunity to an individual to plan his consumption in a way that he gets the maximum satisfaction out of his limited income. Because of money price of every thing is known to him on the basis of which he can ascertain that what he can afford and what he cannot.
iv. An Option for Saving
Money being a store of value helps the individual to make provision for rainy days. During the period of his earning, he may have some thing, which he can use in his old age when his earning has reduced.
v. Recovery Options
Money also helps an individual to cover the gap between income and expenditure intervals, which is done either by withdrawing the past saving or by borrowing. Saving and borrowing have become common and a part of our economic activities.
vi. Possibilities of Specialization
Money has made possible the regional specialization of production on the basis of the most favorable condition principle, which has given birth to international division of labour have reduced the cost, improved the quality and increased the verities of products. Individuals are in a position to consume superior goods at a cheaper price.
vii. Transfer of Value
Money being a measure of value helps the individuals to transfer the value of their fixed assets from one places to another in the country or out side the country. In other words even the immoveable assets have become mobile.
viii. A Source of Income
Because of lending and borrowing practices facilitated by money, the individuals saving become a source of income. The individuals make savings, invest them in productive activities and receive a regular income, which increases their welfare by improving their standard of living.
2. Importance to Economy
The economy of a country is however, benefited by money in more than one-way:
i. Enhancing Exchange Facility
Money enhances the exchange facility and extends the market for goods and services produced in the economy. The extension of market creates demand for goods and services and consequently the resources are fully exploited to increase the output so that the inc4reased demand may be adequately met.
ii. Economies of scale
Money oriented demand provides economics of scale. The economy in such a situation produces goods at a cheaper cost because of the reason that input and output ratio rises.
iii. Increased Opportunities of Employment
Increased volume of production increases the level of employment and income level follows suit. Raised income level stimulates saving and investment and consequently the investment rate in the economy rises.
iv. Facilitate International Trade
Through money international trade is facilitated, which makes the resources of an economy more mobile and such resources are exploited to the maximum extent.
v. Introduction of Lending and Borrowing
Because of money lending and borrowing have become a common practice among the nations of the world. The surplus resources o fan economy moves to another economy, which is deficient in such resources. Flow of resources helps an undeveloped to venture into her development plan. Lending and borrowing practices developed through money, exchange saving and stimulate investment n the economy. As a result the economic growth is accelerated.

Dangers of Money

Money has proved dangers in several ways
1. Economic Instability
Some economists of the view that money is responsible for economic instability. When there was no money, saving was not divorced from investment. Those who saved also invested. But in a monetised economy, saving is done by certain people and investment by some other people. Hence, it does not follow that saving and investment should be equal. When savings in a community exceeds investments, then national income output and employment decrease and the economy is engulfed in depression.
2. Danger of Over-Issue
The main danger of money lies in its liability of being aver issued. The over issue of money may result in inflation. Excessive rise in prices hits hard the consuming public. It endangers speculation and inhibits productive enterprises. It adversely effect distribution of income and wealth in the community so that the gulf between the rich and poor widens.
3. Economic Inequalities
Money has proved to be a very continent tool for amassing wealth and exploitation of the poor by the rich. The misery and degradation has gone to a great extant after the existence of money.
4. Moral Depravity
Money has weakened the moral fiber of the man. The social evil like corruption has proved to be a soul-killing weapon. As said by an eminent German economist Von Mises
“Money is regarded as the cause of theft and murder”.
Money is itself is not bad, but its possession or debt facilitates corruption and crime.

Gresham’s Law

Concept
Gresham’s law can be stated, as

“Bad money tends to drive good money out of circulation when both of them are full legal tender”.
Thus when two kinds of money good and bad circulate together, other things remaining constant, bad money will remain in circulation and good money will go out of circulation.
Classification of Good and Bad Money
Good and bad money may be classified as:
1. Good money is full valued coins of standard wealth and fineness while bad money is the one, which is debased or worn out.
2. Good money may be superior money of higher substance while bad money will be inferior money of less intrinsic value.
Explanation
In the light of the first classification the law may be stated as:
“Whenever legal tender coins of the same face value but of different weight or degree of fineness are in continuous circulation, the light weight or bad coins tend to drive out the full weight fine coins out of circulation”.

Marshal states the law in the light of second classification as:
“ Money which is inferior in respect to exchange or substance value, commonly shows greater tendency in circulation than those which are superior in this respect”.
Application
The law is applicable in three cases:
Under Mono – Metallism
When coins of same metal but of varying weight or fineness or both circulate together at the same face value, it will be the human tendency to keep a brand new coin and give out the depreciated one. Thus the old and worn out coins will tend to drive newly minted full weight fine coins out of circulation.
Under Bi – Metallism
When gold and silver coins are freely circulated as legal tender, then the over valued coin will drive the under value coin out of the game.
Under Paper Currency
When paper money and metallic money circulate together as standard, however paper money being inferior tends to drive metallic money out of circulation.
The reasons for this are:

• Good money is exported to earn profits.
• Good money is hoarded for later adjustments.
• Good coins are melted and sold as bullion.

Exceptions
The law does not operate when:

• There is a shortage of currency.
• When there is strong public opinion against bad money.

Bi Metallism

Definition
Bimetallism is a system of currency under which the price of the monitory unit is regulated with reference to any two metals (generally gold and silver). Both the metals act as a medium of exchange and the standard of value. The two metals remain in circulation side by side. The ratio between their values is fixed and maintained by the currency issuing authority.
Essential Features
The essential features of bimetallism are:
1. Standard coins of two metals, generally gold and silver remain in circulation side by side.
2. Coins of each of the metals remain unlimited legal tender.
3. Generally free coinage of both metals is considered as legal and allowed. But some times free coinage of only one metal is allowed. If it is so then the system is called limping standard.
4. There is a fixed legal ratio of exchange between the two metals e.g. if an American silver coin has 16 g. of silver for every gram of gold in gold coins, the ratio of exchange between the two would be 16:1. Any payment that would be made it would be made keeping in view the ratio between them.
 

Trade Union

Trade Union

Modern industrialization has given rise to a great number of problems. As a result there has been a clash between the interests of labour and organization, the former claming high wages and latter high profits. Today labour has come to realize that they can improve their conditions of work only through collective bargaining with the employers. In the words of Sydney and Webb
“A trade union is a continuous association of wage earners for improving the conditions of their working lives”.

Functions of Trade Unions

Trade unions perform a number of functions. Some of them are classified in these main groups viz:
1. Militant Function
2. Fraternal Functions
3. Political Functions
1. Militant Function
The main function of a trade union is to fight for the basic rights and interests of its members. In doing this they offer the following benefits to the labour.
Job Security
For achieving this objective seniority rights of the workers, control over hiring of labour, grievance procedure for handling cases of discharge etc is used as devices.
Improving Conditions of Work
Trade unions put a pressure on the employers to provide workers with better conditions of work, sufficient recreation facilities, standardized hours of work etc.
Limitation of Output
If a given number of labours produce more than what they ought to be employed for, trade unions make sure for a standardization plan. Hence the output per worker is standardized.
2. Fraternal Function
Fraternal function consists of mutual help for the welfare of the workers. Under this content the trade unions perform the following functions.
Professional Training
Trade unions arrange for education and professional training opportunities training opportunities for their workers and also assist them in improving their efficiency and skill.
Source of Information
Trade unions serve as a source of information for the workers. The workers are guided and advised by the trade unions. Their leaders defuse information by organizing meetings of the workers.
Insurance Facilities
The trade unions also arrange for insurance facilities against risks, accidents etc. they make the workmen compensation act followed in this regard.
3. Political Functions
Many trade unions fight elections to the rights. In many countries strong; labour parties have grown up and in England especially there has been the government in the hands of labour party many times. The trade unions influence the labour party of the government and often clench some labour seats in the legislature

Importance of Labour Unions

Trade unions are of great significance for an economy because of the reason that they create congenial relation between the workers and the management and help a lot in developing mutual understanding among them. This brings industrial peace, which becomes an effective stimulation for the growth and expansion of industries in a country.
Trade unions help the employers by extending cooperation in settlement of labour disputes. In the absence of trade unions it becomes difficult if it is not possible for the employers to contract the individual workers and find out their views on certain issues related to the disputes. Trade unions also assist the employers in labour administration and control. The efficiency of workers is also improved through trade unions and as such, the employers are benefited.

Profits

Profit, Pure or Net Profit, Gross Profit

1. Profit
In the ordinary language the term profit stands for the excess of income/money earned over costs. But in economics profit is defined as a reward for the entrepreneur for performing the function the function of final decision-making and risk bearing.
Profit differs from return on other factors in three important respects.
1. Profit is a residual income and not contractual or certain as in the case of other factors,
2. There are much greater fluctuations in profit than in the reward of other factors and,
3. Profit may be negative i.e. it may be a loss.

2. Pure or Net Profit
Pure or net profit is the amount that accrues to the entrepreneur for assuming their risk inseparable from business under the system of production in anticipation of demand. The essential function of the entrepreneur is considered to be something, which only he can perform. This something cannot be the task of managers, or the people, which are hired. Thus the entrepreneur receives profit as a reward for assuming the final responsibility, a responsibility that cannot be shifted on the shoulders of any one else.

3. Gross Profit
Gross profit stands for the total earnings of the entrepreneur, not necessarily of the entrepreneurial functions only. Some thing else can also be included in this profit. Apart from the net profit, the following are the main constituents of the gross profit.

1. Interest on entrepreneur’s own capital.
2. Rent of land owned by the entrepreneur.
3. Entrepreneur’s wages of management.
4. Gain as superior bargaining.
Monopoly gains.

Constituents of Gross Profit

The main constituents of the gross profit are as follows:
1. Reward for the Factors Supplied by the Entrepreneur Himself
The entrepreneur may have borrowed capital from other sources for investing in the business, he may be the owner of the business premises and perhaps he may also be working as a manager in the business concern. Besides selling him self as a entrepreneur he would have earned interest on his capital, rent of his land or salary for his responsibilities as a manager. But when he becomes an entrepreneur, he would lost all these incomes. Thus profit is a reward for him for loosing such options of income.
2. Entrepreneur’s wages of Management
The wages of management are the return of the work done by the entrepreneur as a manager an could have been done on a salary basis by him for another firm. This is also an important part of gross profit.
3. Gains as Superior Bargainer
Certain gains accrue to the entrepreneur when he bargains with the labours, capitalists, landlord, suppliers of raw material and consumers. These gains are the resultant of his superior skills in bargaining. They form a part of the gross profit.
4. Monopoly Gains
These gains are due to imperfect competition, which enables the entrepreneur to charge higher prices or to pay reward to the factors of production hired by him. The monopoly gains increase his income and becomes a constituent of gross profit.
5. Reward of the Entrepreneur as a Risk Taker
According to the definition of an entrepreneur the function of risk taking must be perform by the entrepreneur him self. Apart from certain risks, which are insurable, the risks that cannot be insured and are necessary to bear, gives entrepreneur the reward of profit.

Different Theories of Profit

Many theories have been put forward by different economists. Some of them are as follows:
1. Dynamic Theory of Profit
The dynamic theory of profit was given by J.B. Clark. According to him profit accrues because the society is dynamic by nature. Since the dynamic nature of society makes future uncertain and any act, the result of which has to come in future, involves risk. Thus profit is the price of risk taking and risk bearing. It arises only in a dynamic society which means in a society where changes does not occur i.e. it is static by nature the risk element disappears and hence the profit element does not exist there.
Actually, a society is said to be dynamic when there is a change in its population, change in trends of the people, change in stock of the capital, change in the supply of entrepreneurs etc. when all these factors becomes constant, the future also becomes certain and the risk element disappears from the society.
According to Clark, profit is the result of an adjustment, which is brought about by the entrepreneurs themselves. They may find new techniques of production by inventing new machines. Their use reduces the cost of production and reduces the course of time as well and gives the entrepreneur higher profits. But when the use of machinery and production becomes common and used by the other entrepreneur operating in the economy. The supply of goods then increase and the prices fall. Hence the profit margin also goes down. Under this situation the profit is determined by the demand and supply of enterprise at a point where they are equal.
Criticism
This theory completely ignores the future or uncertainty. According to Prof. Knight only those changes, which cannot be foreseen, and which cannot be provided in advance will yield profits and not others. Also this theory often gives a misleading conclusion regarding the competition.
2. Marginal Productivity Theory of Profit
According to this theory, profit always equals to the marginal productivity of the entrepreneur. The marginal productivity of the entrepreneur cannot be evaluated in the case of the firm because there is only one entrepreneur in a firm. It is however can be easily done in an industry where the number of the firms can be calculated and hence the marginal productivity of various entrepreneurs can be measured.
According to this theory the profit depends upon the marginal production. Greater the marginal production greater will be the profit.
3. Wages Theory of Profit
According this theory the services of the entrepreneur are also classified as labour though of a superior type. These entrepreneurs do a lot of work in organizing the business unit as well. The entrepreneurs in the shape of profit pay to themselves for service just as managers are paid for their services. It means that profit is a wage for the entrepreneur for the services rendered by them.
4. Un-Certainty Breaking Theory of Profit
According to Prof. Knight
“Profit is the reward for uncertainty bearing and not the risk bearing”.
Prof. Knight has regarded uncertainty bearing as a factor of production. Knight’s theory classifies the position that profit arises because of the joint action of uncertainty bearing and capital.
5. Risk Bearing Theory of Profit
According to F.B. Hawley, “Profit is reward for risk bearing which is the most important function of an entrepreneur”. Hawley believes that risks are unpleasant and therefore no one likes to bear it, until and unless some reward is insured. Profit is a reward for bearing these risks.

Interest

Interest, Gross Interest and Net Interest

Interest
In ordinary language, interest refers to the excess amount, which is paid by the borrower above the amount borrowed after a given period of time usually a year to the lender at an agreed percentage. In economics the term interest refers to a return on capital only. Samuelson defines interest as
“The market rate of interest is that percentage return per year which has to be paid on any safe lone of money, which has to be yielded by any safe bond or other type of security, and which has to be earned on the value of any capital asset in any competitive market where are there are no risks or where all risks have already been taken care by special premium payments to protect against risk”.

It therefore can be said that interest in the price of services of capital in the production of wealth.
Gross Interest
The total amount which a creditor charges from a debtor by way of interest is really Gross interest. It includes the services payments of the capital and the cost of capital. The gross interest means the total amount which a debtor pays to the creditor and their Interest includes certain costs and expanses. Gross interest is composed of certain elements such as insurance against risk, return for inconvenience, wages of management etc.
Net Interest
Net interest is the amount, which is paid for the use of capital only as a factor of production. Net interest is rather the price of the productivity of capital. It is equal to the gross interest minus the cost of lending. Net interest is generally equals to the channels of lending.

Constituents of Gross Interest

Gross interest consist of the following elements:
1. Insurance Against Risk
A creditor knows by his experience that some of his debtor will not repay. Thus he sees a risk in lending. This lose which is likely to be faced by this non-payment is equally distributed over the debtors which are not going to fail in making payment s back. Thus good debtors have to pay for the bad once. Every debtor is good debtor is charged a certain percentage as an insurance against risk.
2. Return for Inconvenience
The inconvenience to the lender is mainly of two types
a. He may have to borrow money and pay interest himself when he would need money in some future time.
b. He may get money back when he may not find some lucrative place to invest it and so his money may remain idol and suffer loss.
In order to avoid the above two situations the creditor often charge something extra over and above pure interest.
3. Wages of Management
The creditors do a lot of work for their money lending business. They have to keep accounts, frequently visit the debtors reminding them about the loans etc. It seems to be their whole time job. Similarly in this business they would have lost the chance of making money by doing something else. This lose also has to be borne by the creditor.

Why Interest is Paid?

Interest is paid for the following reasons:
1. Capital is Productive
Capital improves the quality and increases the quantity of out put with in a given time. It means that capital contributes in the national dividend and therefore it is demanded and paid as a share of capital in the national dividend.
2. Capital Involves Lending
Capital has a lending cost behind it. This why interest is demanded and paid to cover the lending cost.
3. Capital is Capable of Alternative Uses
Capital is a secure commodity so it commands price. Therefore interest is demanded because of scarcity of capital.
4. Capital Increases the Efficiency of Land and Labour
Capital increases the efficiency of land and labour and reduces the cost per unit of out put. Interest is therefore demanded and paid because it reduces cost per unit and also brings out a standard in the production.
5. Capital is Mobile
Capital is mobile and it moves easily from one channel of production to another within a country. Sometimes it also moves out side the country. Interest is demanded because of its productivity and scarcity due to mobility and is therefore paid.
6. Capital is a Result of Saving + Lending
Both saving and lending are painful in the sense that saving involves sacrifice of present consumption and lending. It involves the risk of bad debts and it also involves the risk for long term waiting for the amount to be returned. Interest is demanded for such a sacrifice and inconvenience.
7. Capital Serves as a Substitute for Land and Labour
Interest is demanded for the service of capital which substitutes land and labour and is accordingly paid

Liquidity Preference Theory

Concept of the Theory
The liquidity preference theory was first enunciated by Lord Keynes. This theory is based on consumption and saving of an individual given a certain amount of income. According to Keynes an individual has a limited (given) amount of income which require two decisions on his part
a. How much he has to consume? And
b. How much he has to save?
The decision regarding consumption is called propensity to consume in the words of Keynes, which he spends, on consuming goods. After spending the individual has a certain proportion of his income left with him, which is his saving. Again he has to decide that weather he has to hold his saving in the form of cash or in the form of capital for earning interest. This is what Keynes has called liquidity preference. The smaller the desire to lend, the higher the liquidity preference.
Factors Governing Liquidity Preference
The liquidity preference of a particular person depends on a number of conditions. These may be:
1. Transaction Motive
The transaction motive relates to the demand for money or 5the need for cash resulting due to an individual’s current personal and business transaction and exchanges.
2. Precautionary Motive
Precautionary motive refers to the desire of the people to hold cash or sustain the saving for any unseen emergencies.
3. Speculative Motive
It relates to hold cash or resources in liquid form in order to take advantage of the market movements regarding the future changes in prices.
According to Keynes most of the people save money with speculative motive.
Determination of the Rate Interest
In the Keynesian world the demand for money or the liquidity preference and the supply of money determine the rate of interest. It is infect the liquidity preference for speculative motive, which along with the quality of money determines the rate of interest.
Criticism
The liquidity preference theory is often criticized on the following grounds:
1. The rate of interest is not a purely monetary phenomenon. One of the major criticisms made on this theory is that the rate of interest is not purely monetary phenomenon as real forces like productivity of capital etc also play an important role in the determination of the rate of interest.
2. Liquidity preference is not the only factor governing. The agreement for this statement was that there are several other factors that influence the rate of interest by the demand for and supply of investible funds
3. Keynis ignores saving or waiting as a source or means of investible fund
4. Keynis theory explains interest in the short run only and also does not explain the existence of different rates of interest prevailing in the market at the same time.

Wages

Wages and Its Forms

Wages
In very simple words, the remuneration that is made for the service of the labour is called wages. Wage payment is essentially the price paid for the particular commodity viz labour. Berham defines wages as:
“Sum of money paid under contract by an employer to a worker for the service rendered.”
Forms of Wages
Broadly speaking, wages are categorized as:
1. Normal Wages
Normal or money wages are the wages paid or received by the labour in terms of money . Money is the principle factor in normal or money wages. The wages are calculated in terms of money in this regard.
2. Real Wages
Real wages refer to the income of a worker in terms of real benefits. E.g. bonuses, holidays, transport.
In other words, the value of additional income is called real wages. It is the real wages that enable us to clear that the worker really earns.

Factors Determining Real Wages

Some of the factors that determine real wages are as follows
1. Purchasing Power of Money
The purchasing power of money has great influence on the real wages. The value of money keeps on changing constantly which varies inversely with the price level. This purchasing power of money influences the calculation how much the worker a worker earns since all the monitory calculation depends on the value of money. The places where the prices are high the real wage will be low and vice versa.
2. Subsidiary Wages
The worker earning other than regular wages have higher real wages. In order to find the real earnings of a worker, we should not only consider his salary but also the extra earning that he may be able to make. A worker may work part time and in such case his real wage will be higher as compared to the worker working only on regular wages.
3. Working Hours and Holidays
Real wages to a great extant depend upon the working hours and holidays. Obviously a worker working for more time and enjoying less holidays will have higher real wages. His income will always be higher and so will be his real wages.
4. Future Prospects
Future prospects means opportunities for the future. A businessman viewing a good prospect for his business in the future will pay higher real wages to his workers so that they can work more willingly to make best use of the opportunities of the future. However a business not having very bright prospect may even offer higher wages.
5. Nature of Work
The occupation which require great amount of skills and whose nature is quite dangerous offers high wages to the labours. The work requiring more physical and mental capabilities should offer high money and benefits to the labours.
6. Expenses
In order to calculate the real wages the expenses must also be considered. The workers incurs certain expenditures which must be deducted in order to get the final figures.

Relative Wages

The concept of relative wages explains the comparison between money and real wages. It explains that only the wages of labourers of different occupations employment or grades are different from each other. It tells that why some men working at the same place and at same level in different organizations receive different wages.

Causes of Differences

1. Differences in Efficiency of Labour
The labour to a great extant depends on its efficiency. This efficiency may include education, necessary skills to perform a job condition of work etc. As a general rule, the higher will be the wages and lower efficiency, lower will be the wages. It implies that more efficient workers are likely to earn higher wages as compared to inefficient once.
2. Training
Training is one of the important offers for the employees. Most of the organizations after recruiting labour provide them proper training necessary for their jobs. In this way skilled persons get a chance to groom themselves during which they receive very minimum remuneration. But as soon as they get trained they are offered respectable jobs and are absorbed easily at high wages.
3. Regularity of Work
Regularity of work has an important impact on the wages of the worker. Actually there are two categories of businesses viz: Seasonal i.e. for limited period of time and Non Seasonal i.e. for whole or unlimited period of time. Generally the labour workings in seasonal factories are often paid higher wages as compared to those working in non-seasonal ones. The simple reason behind it is that the organizations working seasonally hire the service of the labour for the limited period of time and thus pay them handsomely.
4. Degree of Trust and Responsibility
One of the major reasons of difference in the wages is the degree of trust and responsibility. As a normal course the men working at positions of high responsibility are usually highly paid. This is so because their jobs require high degree of skill; sense of responsibility and good decision-making abilities and this is what they are paid for.
5. Hours of Work
The working hours are also important in determinants of wages. The workers working for more time are paid more wages as compared to the workers working for less period of time even in the same organizations. This is why the working hours are classified as part-time or full time jobs.
6. Extra Benefits
A very interesting fact about wages is that the workers enjoying more fringe benefits are often paid low wages. Usually the wages are high in those occupations or business where such benefits are not offered. For example in a factory a worker may be earning RS 1,800 but he may be getting medical allowance, housing allowance, old age pension, bonuses etc