Money and Its Functions in Modern Economy

The Finance University under the Government of the Russian Federation International Finance Faculty Term Paper Money and its functions in modern economy Klyagin M. I. Group IFF 2-2 Tutor: Olga V. Kadysheva/ Svetlana E. Tsvirko Moscow 2010 Table of contents INTRODUCTION3 CHAPTER 1. Nature of money in today’s economy5 1. 1. The concept and types of money5 1. 2. Functions of money7 CHAPTER 2. The role of money in the modern market economy. 17 2. 1 The role of money in the production process. 17 2. 2.

Differences in characteristics of the role of money. 22 Conclusion. 25 The list of references. 26 Introduction Money is one of the greatest inventions of a human thought. Perhaps, the whole structure of today’s economy is predetermined by the existence of money. But when did money occur and what was the reason for its occurrence? Money is a public institution, which increases wealth buy reducing the cost of exchange and contributing to greater specialization in occupation o, according to ones comparative advantage.

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Money appeared due to trade, and since it is established that trade is one of the most ancient occupations of mankind, therefore the emergence of the monetary system can be dated back to the times of antiquity. The origin of money is associated with 7-8 thousand years BC, when primitive tribes understood that they had surplus of some goods, which could be exchanged for other needed products. Historically, as a means of exchange, human used animals, furs, stones, shells etc. So money is determined by society itself, whatever the society recognize as a mean of exchange – is money.

Money is an integral element of commodity production, which means its simultaneous development, so it can be considered that money take certain shapes at each stage of economy, which best correspond to the nature and needs of its current level. Understanding of such term as money, their role in the economy and the logic of its development comes from the knowledge of the laws of economics. Similar to any social phenomenon, money show itself in the action – through its functions. In the course of evolution, some functions of money gradually change and transform into new, more mature and sophisticated forms.

After many centuries the four following forms of many have been determined: a measure of value, a means of preserving of value, a means of exchange and a means of payment. Moreover money as a measure of value and as a mean of preserving of value got formed as basic functions and from these ones later it started to function as a mean of exchange and payment. All the varieties of money function as a measure of value, as all of them serve as means of expressing of value of goods and resources, existing in global economy.

Therefore, being a measure of value at a first place can be considered a prime function and a common feature of all types of money from the times of its occurrence. Basically, with the introduction of a new product this function of money is involved, expressing the value of the goods in terms of money, and then the shell of the goods is discarded and money act in a symbolic way – as a mean of a public expression of a value of that goods, which is represented in some quantity of money.

The aim of the current course work is to study the money and its roles and functions in the modern economy. CHAPTER 1. Nature of money in today’s economy 1. 1. The concept and types of money Money – is a multifunctional product, a universal equivalent which expresses the value of other goods. At the same time it is a counting unit, a unit of exchange and the most convenient unit of value calculation and accumulation. Money is an important component of modern society which has emerged as a product of economic relations and trade activities.

The appearance of money was preceded by barter, but due to rapid evolution it eventually lost its effectiveness and relevance. Modern money is a result of long evolution, which includes the following stages: 1. Commodity money (The ancient people of Oceania expressed the cost of goods in terms of rare shells, pastoralist tribes used cattle for the same purpose, ancient Celtics used stones and people of North used the skins and furs of valuable animals. For a long period a measure of value of ancient people was expressed through the products of their occupations (hunting or gathering). 2. Silver monometallism – the era of money made of silver. 3. Bimetallism – it became possible to pay for goods not only for silver but also for gold; 4. Gold monometalism – gold gradually replaced old forms of money and the era of the gold standard started. The demand for gold was totally due to its properties, as it was rather convenient to manufacture coins of such a rare and beautiful metal. Paper money appeared as a consequence of the inconvenience of gold coins in use (they were quickly losing their appearance and weighted a lot).

Therefore the Gold standard finally collapsed in the first half of the XX century. In the period of the First World War banks started to refuse to change paper money into gold and this situation got even more intense in the times of the Great Depression of 1929-1933. At the end of the World War II a dollar standard had been set at a conference in USA, and in 1973 in Jamaica a system of floating currencies was adopted. Today’s money is easy in use and being constantly modified, often changes its forms. In this regard, we can speak of different forms of money: . Cash – money which is represented in metal coins or printed paper money; 2. Non-cash payment – those usually take place in the joint activity of enterprises; 3. Credit money: bills, receipts and various debt obligations; 4. E-money – in the 21st century it has became the most popular in the form of electronic bank cards: a. Debit card – provides the client with the sum of money available on the account; b. Credit card – payment is made “in debt”, with the agreement to repay it in a certain period of time; 1. 2. Functions of money

Being a measure of value – is the first and universal function of money. Every type of money, regardless of how well it performs other functions, will always function as a measurement of value. This happens, because all types of money which are used in the national economy at a given moment in time are intended to express the values of resources, which are involved. Different types of money are just parts of the overall money supply system, which, considering the velocity of circulation, act as an expression of total value of all the goods in the market.

In the economy, that is in the market, at any point in time, there is a total supply of goods and services on one side, representing an embodiment of consumers’ value, and on the other side, this supply of commodities is opposed by the money supply, representing its value in terms of real money, of course taking velocity of money into account. To express the value of commodity – is basically the purpose of money. This function is performed in such a way, that at the first place it evaluates goods in terms of quantity of money, which then appears in society.

Acting as a mean of expressing the values of goods and services, money at the same time acts as a measurement of values of those goods. The mechanism of this process is explained by the fact, that a unit of currency is actually a measurement of value, which expresses the fractional value of the total value of all goods and services available in the market. The value of the goods, expressed in terms of money, appears in society in the form of price. Price therefore is the expression of the value of goods in units of currency.

That is why, when we speak of change in the price of commodities under the influence of different conditions, we imply the changes in the value of those goods, expressed in money terms. Comparative and relative nature of the value of goods means that this value is also a relative measure. As a measure of value is just a fraction of the total value of the entire supply of all goods, it moves and changes at different time periods, correspondingly with the changes in the value of the whole supply of goods in a market. Measure of value is the fractional value of aggregate value of all commodities in the market.

Just like from a drop of solution we can find what substances it contains, similarly a monetary unit can show the relative proportions of all commodities represented in it. The formation of the value measurement function of the money began barter. Simple barter is the initial stage of development of “goods-money” relations. I’d like to recall, that the exchange is a universal way of economic ties among members of society of that time, when the division of labor was formed. Barter was the first form of exchange and it spawned the original and the most general formula for the exchange: goods on goods (G-G).

This formula, in general terms, represents the exchange of economic activities, which is created by economic agents in society. Later, barter developed and became more complicated due to development of the economy, both through occurrences of new goods, and through the improving of the transactions’ system. In the course of barter economy and production of goods which appeared due to it, two interrelated processes occurred: * The formation and consolidation of exchange ratios, which later became the prices of goods; * The establishment of one goods among all the commodities, which actually plays the role of money.

Measure of value had been generated before money itself appeared and formed as an economic phenomenon. Originally, the measure of value occurs and exists for quite a long period of time as a simple exchange ratio of goods that is the proportion in which goods were exchanged. This exchange ratio is formally the price of the goods, although not yet expressed in form of money, but in terms of one or many different goods, which, due to this, will play the role of money later.

The most “representative” product became a carrier of this process, a measurement of the value of other commodities, and consequently, in addition to its original role as a specific item, it became a tool of exchange, and therefore primitive analogue of money. Ergo, from the times of its origin, money already had been arising as perfect abstract values, although for a long time its value had been associated with the material objects. The first money, for a good while, functioned only as a measurement of value, while the exchange was still made in an old way, not bringing money into game.

Prices of goods existed only in the form of simple exchange ratios, which had little by little become habitual and conventionally accepted, were turning into traditions. Mainly that happened at places, where exchange of commodities had transformed into a stable regularly recurring phenomenon, as, for example, in trade relations of agricultural and pastoral communities. Later on, the increasing number and diversity of exchange ratios in such traditional system of trade relations, led to results, that the key role in exchange was played by the only one item, which then became the unit of the measurement of value.

Such commodity was the measure of the value of all other goods and served as money, exactly in that capacity. Depending on the locality and the convenience of counting, the measure of the value could be either a unit of cattle, or a certain weight or volume of such goods as salt, wheat, etc. Due to the growth and wide application of standards of prices, the prices of goods in its monetary values, had finally transformed into the names of the currencies. Following this, money, in which values of goods were expressed, obtained a new life, as it was divorced the item’s real existence.

Money as a measure of value had finally become units of account. As soon as the appropriate standard of price is formed and accepted in society and state authority it becomes possible to use the money of account. The money of account is an attribute of fair trade relations, when there is a constant production of goods and exchanges in the market, thus prices for commodities in the market acquire certain stability. It becomes necessary to compare costs and profits.

In a sense, this was facilitated by virtue of conservatism of methods of production applied in the distant past, when the correspondence between costs and profits could be disturbed under the influence of external factors, such as disaster or military-political conflict (bad harvest, war, political or social upheaval, etc. ). Nevertheless, at unworried times, prices of the goods remained relatively stable. The recurring production of goods enabled money of account to be used for setting prices of commodities, without use of material money.

Fixing of price became mental, perfect process, for which the necessity for the presence of real gold was dismissed. At the same time occurred and developed such kinds of activity, as accounting, systematic recordkeeping and analysis of economic processes. In all these areas of activity, money played the role of units of account, the scale of application of which progressed simultaneously with the development of commodity relations. Particularly the significance of this function of money can be clearly seen in modern economy.

The usage of money of account in the cost accounting and fixing of the price gives producer an opportunity to quantify and compare the feasibility and profitability of his business. Producer of commodity set the price of the goods, even before those goods are actually offered for sale in the form of accounting money. The real price, at which goods will be sold, may be noticeably different from the one, producer is oriented to, and then he will have to make adjustments in the operation of the company or completely bring production to a stop.

This can be explained by the fact that the usefulness of a product to society can only be determined by the exchange ratio in a market, whereas the price, which a consumer is ready to pay for the good, is an assessment of producer’s economic performance. The transformation of money in the form of real commodities into the form of units of account is both, the first step, on the way of money, from the existence as material goods, to the subsistence as symbolic, conditional money, capable of performing its functions, moreover not possessing an intrinsic value of the material it have been made from.

In such form, money is used to measure prices and cost accounting, to calculate a price value of property and other needs, when there is no need in other monetary functions. Along with the development of business accounting, counting money is widely used as a tool of economic analysis on micro and macro levels. The function of value preserving (“save function”) is the second constitutive role of money after a value measurement function.

The presence of these two functions is a necessary and sufficient condition, that a given economic category does really represent money. “Save function” was generated by the development of exchange and its transition from isolated acts of barter to the form of regular trade, as a more advanced form of goods exchange. As distinct from barter with its narrow range of participants, and changeable goods, trade meant the involvement of a large quantity of various commodities and the increase in the number of transactions and its participants in a market.

Under these circumstances, the direct exchange of goods became extremely difficult and often almost impossible. A necessity to sell goods first and then to purchase other commodities for the earnings occurred. This became possible only with the advent of money. So, being a single formula of exchange transaction in the beginning was divided into two autonomous parts and became more complicated. Instead of a direct exchange (G-G), two separate phases occurred: the sale (G-M), and then the purchase (M-G).

Therefore in between of the initial and final phase of the exchange transaction a mediator in the form of money appeared, whose task was not only to be a measure of value, but also to preserve the value of goods, involved in transaction, until it’s over. A facility, in exchange for which one product is sold and other is obtained, had to possess the property to preserve the value of the goods, in the period of time, until the appropriate goods is found and purchased. Quite often, the purchase of the needed commodity took long time, and thus, preserving of a value became a crucial feature of money.

Decisions of a kind of where and when to buy goods, were taken buy every original seller of products. Consequently, many traders started to sell goods for money. Obviously, many participants in exchange transactions occurred, as sellers and buyers regularly swapped: the one, who had just been a seller, had to become a purchaser to complete the exchange cycle (G-M-G). As trade gradually evolved from barter, the role of money could only be played by the product, which had been used in barter exchange for a long period of time and became common as a measurement of value.

When such a commodity was notably distinguished from the general mass of goods, holding not only the property to be a measure of value, but also convenient material qualities, which allowed it to serve a means of value preserving, it became money. One can argue, that exactly this unique ability, to serve as a means of preserving a value over a long period of time, made gold the best possible material to use as money in the times of the formation and development of real money. At a time, when the function of value measurement occurred, money goods were not involved in exchange transactions as a mediator at a constant.

Exchange transactions often occurred directly, as money was only means to measure and determine the ratios of exchange. Nevertheless, this worked perfectly, as every commodity, involved in transaction, had been previously exchanged for money goods, making optional the particular presence of money goods in this exchange transaction. In this case, money goods itself is still a part of commodity market, but with obtained function of value measurement, marking it out of a mass of commodities.

The ability of money to act as a means of preserving a value becomes an obligatory prerequisite for money to perform its functions as a means of exchange and means of payment. In the era of when money was in form of some commodities, function of preserving a value was performed by transformation of money into the treasure. In this case, money goods performed this function in a passive way. It became a reserve for other functions of money: a means of exchange and means of payment. Functioning as the treasure, metal coins came back into existence as money goods, what means a step back on the way of money development.

As a means of preserving a value, therefore being a treasure itself, gold appeared to be the universal embodiment of wealth, since in addition to its own price, it had acted as a representative of all other commodities. At a time when the gold coin was left out of money circulation to become treasure, gold coins transformed into money goods, and vice versa, during the transition from the treasure back into the means of exchange or means of payment, money goods once again became money. For these reasons, the accumulation of treasure beyond the needed amounts meant the immobilization of wealth.

The potential power of gold as money, to exchange for all other products, transformed the gold into a claim for any other goods and for public wealth. The more gold was accumulated in one’s hands, whether it was an individual, a company or a government, the greater was the claim, and the more were the reasons for the owner of the gold to consider himself rich. In form of treasure the gold was necessary to ensure uninterrupted functioning of monetary system in the era of gold monometallism.

As such, it served as a reserve fund for means of exchange, means of payment and the reserve fund for all worlds’ money. These treasure’s functions were a necessary condition for the stability of the metallic monetary system. In this case, the proper value of gold as a commodity and its capacity to maintain it for a long time came to a foreground. Continuous changes in the volume of goods supply required corresponding changes in the money supply. Ebbs and flows of money in circulation provided a dynamic balance in the monetary system.

The desire for gold accumulation was a characteristic of early capitalism. This period in the history is also called mercantilism. At our times, the desire to accumulate gold remained in the form of customs and traditions of some nations with the purpose to insure accumulated wealth for “a rainy day”, as a sign of big wealth (jewelry, old coins, etc. ) and as a means of protection against inflation. Until recently, despite gold is no longer considered to be money, gold was widely used by private business as a treasure. It was ommon to invest funds into gold, taking in account the future growth of its price. However, the depreciation of the gold over the past decade, compared to all other goods, makes such investments meaningless. As a means of protection against inflation, gold is confronted by antiques, gems and real estate. The important function is still maintained by the centralized governments gold reserves. After the cessation of the dollar to gold exchange (August 15, 1971), the gold ceased to be considered money, as it was no longer carrying out money functions. However, gold hasn’t lost its own value as a commodity.

While the gold is a demanded product in the world market, and there is a demand from various industries, such as jewelry, medicine, as well as private companies, the government may use its gold reserve to sell some gold, with the purpose to purchase foreign currency and to replenish its main foreign exchange reserve. With regard to credit money, a means of preserving a value transformed from a treasure into a means of accumulation. Money as a means of exchange, serve as an intermediary in the trade of goods that is in the movement of goods from sellers to purchasers.

This money function is generated when a transition from barter to regular trade in a society occurs. As a means of exchange money becomes a permanent feature of the market. The trade formula therefore involves money as a constant mediator in the circulation of goods. Innumerable separate acts of G-M and M-G, taken in aggregate, becomes a constant process of G-M-G. While the separate amounts of money “live fleeting lives”, endlessly passing from hands to hands, not staying for too long in one’s ownership, the whole overall money supply, being in circulation, always remains in this realm.

In the case, goods come in the market as temporary commodities, which mean that they are immediately purchased to be consumed, money as a means of exchange always stay in the market and are never gone. Now it is in the life of a product an act of exchange is just an episode, while for the money the exchange is a way of its existence. After becoming an embodiment of values of the commodity world, money appears as a society claim to the appropriate volume of goods supply in the capacity of value in use.

This commodity supply appears only when the society claim for it, expressed in terms of money, is realized in the form of demand. That is, goods supply is set in motion only on call of money. In each of the numerous transactions, for the seller, the buyer is an authorized representative of the society, with the purchase verifying the demand of the society for these goods. Money function to be a means of exchange arises from the capacity of money to move around separately from commodities, as a public embodiment of their values that is from the development and modernization of a means of preserving a value function.

When the universal formula of trade (G-M-G) is divided into two parts: G-M and then M-G, this means, that at first money act as a means of preserving the value, and then, in the second act as a means of exchange. After the first act (G-M) of transaction is committed, the seller of the original good may not find wanted goods in a given market at a given time. He will have to either to return to this market after a while or to move to another market. During that, may be very short, period of time until he will find and buy the goods, he own the money, which serve a function of preserving the value.

Only when he will pay for the goods he wish to buy from some seller, the second act of transaction will occur (M-G) and the money will appear as a means of exchange. Between the first and second parts of the transaction there can be a considerable rupture, both in time, and in space. The economic theory treats this rupture as the first abstract possibility of crises. This possibility can be realized in an epoch of capitalism and credit money, when infringements of economic proportions, and the economic crises which arise due to them, become the regular phenomenon.

The development of scales and intensity of trade leads to the consequence that the role of money in a circulation of goods (G-M-G) becomes more and more short-term and fleeting. This role is almost completely reduced to the function of exchange, which money carries out, continuously passing from hands to hands. However and thus, stiffening in one’s hands even for the short moment, money represents itself as means of preserving of value. As a means of exchange money is gradually forced out by their signs, symbols. This process has occupied a long historical period.

Expansion and trade development leads to occurrence of coins which in process of increase and growing intensity of trade in the increasing degree are perceived by a society as value signs due to their fleeting role in purchases and sale transactions. The identification of coins with value signs was promoted by their wiping in process of circulation, and also conscious spoil of a coin by the state for the purpose of extraction of an additional income from production and release of money. During an epoch of capitalism instead of coins some kind of credit money – banknotes, are used.

This kind of credit money is specially intended only for accomplishment of a means of exchange function. The provision of stability of banknotes in circulation was remaining a hard task for a very long period of time as it didn’t have own properties of credit money, and consequently the principle of exchange of banknotes on gold by nominal value was in use. Through this principle communication and interaction between metal and credit monetary were ensured and that provided stability inside the monetary market.

If the condition of free exchange was followed, then in internal circulation of banknotes acted as equivalent substitutes of gold coins. Under this condition, it is possible to consider that with reference to a gold standard epoch (in countries and time periods when it functioned), it is a question of functioning of two monetary systems when gold continued to act as a measure of value and means of preserving of value, and in circulation it was replaced with the change of credit money for gold in the form of banknotes.

Conformity of quantity of money measuring value of the goods in circulation was provided along with growth of volume of credit money by outflow or inflow of gold from circulation, by transition of gold coins into the form of treasure and back, and also by exchange of gold for banknotes and contributions. It is the significant and most developed function of money in a national economy. Its formation assumes the promotion of commodity relations on high enough level of development.

Regular systematic production for the market generates the steady economic communications based on a job specialization and a specialization of commodity producers in a society. In monetary sphere conditions, for the distribution of credit relations as a steady economic event, are created. Sale of the goods with a payment adjourning condition becomes a necessary element of economic life and a production process component. It is applied as a payments for raw and semifinished products and payment for finished product in economic relations between manufacturers and traders, as a payment in many other operations.

Marketing on credit also becomes a regular phenomenon. A necessity of a public guarantee of execution of payment occurs, and it is performed by the corresponding state legislation. With the development of credit relations between commodity producers and implementation of a means of payment function, the isolation of “money world” and construction of metal monetary system though comes to an end. As an instrument of payment money is capable to serve not only the movement of goods, but also capital transfer.

Therefore the instrument of payment is the most important of all known functions of the money, corresponding to the period of mature capitalism. A means of payment was most completely embodied in the form of credit money, but this embodiment became only possible due to the fact, that it had already existed before and had gradually gained in strength during the times of natural money. Function of being a means of payment arises in the beginning of the non-goods circulation. A source of this function is the credit and evolved out of this economic relation, debt obligations.

But to issue a loan to somebody, money should firstly exist in the form of the saved up fund, separated from money in circulation, i. e. as means of preserving of value. Consequently, function of being an instrument of payment also take its origin from function of preserving a value, as it took place with a means of exchange function. But unlike the above-mentioned one, a function of being a means of payment has far more difficult and major problems to consider. A means of payment becomes necessary first of all not for the aim of servicing an exchange of values, but for the provision of an increase of the value by its accumulation itself.

With the advent of payment function, economic bases for transformation of the circulation, as an independent phenomenon at the moment of accumulating, which acquires character of continuous public process, are pledged. But during the pre-capitalistic period this tendency exists as a germ, at the initial stage, while the tendency of growth of commodity and currency circulation actively develops and reaches its maturity stage. Development of function of money as a means of payment is dictated by requirements of capitalism and serves for capital movement and accumulation.

Function of a payment also arises out of function of preserving a value as a means of exchange function has previously arose. For this reason function of being an instrument of payment, being related, but at the same time being the later one, and accordingly a higher function, than a means of exchange function, since it already includes also this last function as own part, but in other, higher form. Payment is capable to displace circulation, – in the beginning partially, and then in the increasing degree, aspiring to its definitive replacement.

Means of a payment progresses together with development of capitalism and credit money, which is peculiar to it. CHAPTER 2. The role of money in the modern market economy. 2. 1 The role of money in the production process. Results of application and influence of money for various aspects of activity and development of society characterize its role. Versatile use of money and their influence on a country’s development is based in respect of, that goods is produced by the enterprises not for own needs, but for other consumers, for whom it is sold for money.

In other words, produced commodities take shape of the goods; between participants of processes of production and realization of the goods there are goods-money relations. The role of money, at a first place, is shown in results of participation of money in a commodity price establishment. In the conditions of market economy this size is determined, proceeding from a goods cost, with a possible deviation of the price from the cost of production. Commodity price is influenced by a ratio of supply and demand and a competition that allows reducing commodity price.

However price reduction can be possible only for manufacturers, which can admit low level of costs. On the contrary, manufacturers who have level of costs above the line are forced to decrease its costs or to reduce production of such goods. Consequently the pricing mechanism is directed, on the increase of production efficiency and on decrease of the level of costs. Money has a high profile in the course of monetary turnover, when they carry out function of a means of exchange and of means of payment.

With the payment for acquired goods and rendered services the purchaser supervises a price level and quality of goods and services, which forces manufacturers to reduce the prices and to increase quality of goods. Therefore it results in the production efficiency increase. It seems doubtful the expediency of transition to free rendering in some types of service, for example free journey on the city passenger transport, applied in some regions. Here occurs an easing of interest of transporting agencies in the quantity increase of transportations and in improvement of services for passengers, as the dependence of income on olume and quality of the rendered services is forfeited (financing of transport agency by local authorities doesn’t depend on the volume of transportations executed). The role of money changes in connection with altering conditions of economy. At a transition to market economy its role raises. So the scope of possible money applications extends with a possibility of enterprise and property privatization, including real estate. The role of money is growing in strengthening of interest in improvement of work of the enterprises, property usage, including the possibility of increase in dividends.

Such increase in Russia, in present conditions is connected, to a certain extent, with restrictions of state regulation of the prices. On the contrary, inflationary tendencies are accompanied by easing of a role of money and some narrowing of the sphere of its application. In this respect it is possible to mark out the expansion of barter operations, where there is no turnover of money. It is necessary also to single out restrictions for possibility of money usage for loan operations, especially for capital investments in connection with danger of money depreciation.

Besides, the depreciation of money leads to decrease in the interest for accumulation of rubles, that causes increase in investments in freely convertible currency, mainly US dollars. The sum of a foreign currency accumulated by population, indirectly testifies of exported from the country, for the corresponding sum, commodity-material assets, instead of which, population still has cash foreign currency on hands. At the same time, foreign currency accumulated by population, testifies, that the country, which is the emitter of such currency, receives a free issue resource, for the corresponding sum, which can be used for credit operations.

With the existence of payment crises, a practice of advance payment (a payment made in advance) is widely used by the enterprises which acquire goods. It is accompanied by easing of a role of money in the control of the buyer for quality of goods and timeliness of its delivery. Money plays a crucial role in economic activities of enterprises, in the functioning of state structures, in strengthening of public interest in development and production efficiency increase, and economical resource utilization. By means of money it is possible to specify not only total size of costs (materials, depreciation, the electricity cost, the salary, etc. spent on production of each kind of goods and their cumulative volume, but also to determine results of production by means of the price of separate kinds of goods, all its volume, size of the received profit. Without use of money, it is obviously not possible to specify a total volume of costs for production of separate kinds of goods, using only various economic indicators. An application of money allows comparing sales revenue from realized goods and its parts with production costs, to estimate advantage of production of each kind of goods.

Thereby preconditions for strengthening the interest in expansion of production of the most profitable types of goods, which is aimed to decrease costs, increase profits and production efficiency, are created. Property isolation of manufacturers and the dependence of expenses from monetary receipts give rise to interest in increased production and decrease in costs. So, for carrying out of required costs on goods production (acquisition of materials, wages, etc. ), and also for other expenses and for production expansion, enterprises should have corresponding monetary funds.

To accumulate needed amount it is necessary to increase level of production and product realization, so to reduce costs At the same time the dependence of expenditures from the size of monetary receipts induces to formation of reserves of materials only at a minimum necessary size. At insufficiency of own funds for formation of the increased reserves, the manufacturer can ask for a loan for this purpose, but this is associated with additional costs (%) which are undesirable as such costs constitute a direct deduction from income.

Successful performance of state structures to satisfy social and other needs assumes an income reception for this purpose (at the expense of taxes and other sources) and its reasonable expenditure. Use of money allows undertaking measures to coordinate and achieve a balanced proportion in the size of cash incomes and expenses. State structures can also promote the expansion of production of separate industries and certain kinds of goods by means of capital financing on such purposes.

Besides, by withdrawal of a part of incomes from the enterprises for the state needs, it is possible to stimulate the development of separate sites of an economy by granting of tax discounts and other privileges. At the same time, with the expenditure of public funds there is a possibility to apply monetary expenditure rates, which causes a necessity of economical use of cash means. Taking into consideration such thing as inflation, when purchasing capacity of monetary unit is subject to changes, reliability on budget plans significantly decreases.

On the contrary, application of steady monetary unit with the stable purchasing capacity raises reliability and validity of accepted and performed budget plans. It stresses the importance of overcoming of inflation, and a need in transition to steady monetary unit. Monetary payments (wages) to workers and employees, cash incomes of businessmen induce them to take the participation in the production processes, therefore to contribute in the increase of its volume and in goods realization, as citizens’ and businessmen’s cash incomes tend to grow and accordingly can promote an increase in the level of their welfare.

Unlike natural distribution of goods between participants of its production, monetary payment allows to differentiate a structure and assortment of goods, used for consumption by citizens due to an acquisition of the necessary goods. Thus the owner of money can not only choose the goods he needs, but also monitor and control the price and quality of the acquired goods. The crucial role is carried out by money in economic interrelations with other countries. Money is used for an estimation and determination of advantages of export and import of the goods, and also for monetary calculations for such operations.

Money is also applied to make calculations between the countries, considering credit and other non-commodity operations. To characterize the role of money in the external economic relations it is important to consider a following statement: in each country the budget balance where the operations expressed in money terms on exports and imports of the goods is periodically constituted and compared; As a result of exports and imports volumes comparison for the certain time period, all the operations are summed up in the form of active (Export ;gt; Import) or passive (Export ;lt; Import) budget balances.

Budget balance data is used not only for an estimation of the existing ratio of export and import of the goods, but also for the development and carrying out of measures for an optimization of a ratio of export and import. So, at passive trade balance measures to decrease the level of import and increase export are undertaken. If this would not happen, it would be necessary to export a currency for the amount equal to one in passive trade balance. The similar approach is used in concern of a payments balance which includes payments on commodity operations (export, import), calculations on credit interrelations and some other obligations.

It is not worth to reduce a role of money in the external economic relations to just an estimation of forming position in export-import area, and also other non-commodity calculations. Such calculations with foreign counterparts occur in hard currencies, which rates are subject to changes that render enormous influence on profitability of export-import transactions. Even more difficult the situation occurs in Russia where monetary unit (ruble) isn’t a hard currency. In Russia there is an internal convertibility consisting in the right of an exchange (purchase, sale) of hard currencies for rubles.

Thus in the external economic relations rubles in modern conditions, as a rule, aren’t applied. Depending on an exchange rate there is an interest in expansion of export-import transactions or such operations are shut down as unprofitable. Thus the decrease in the exchange value of ruble in respect of hard currency stimulates export, and an increase in the exchange value of ruble a cause an export reduction. An increase in the efficiency of economic development, make for events for strengthening of the role of money.

For this purpose the overcoming of inflation is of the great sense, and also the expansion of a scope of money application, enhancement of the process of its circulation, consecutive linkage of money supply with needs of circulation. At the same time it is necessary to consider, that in order to promote the consecutive strengthening of the role of money in growing economy, significant tasks should be undertaken: support of a monetary circulation with funds, corresponding to economical needs; measures to achieve the stability of a currency unit, expressed through its purchasing power. 2. 2.

Differences in characteristics of the role of money. Occurrence of money, change of its forms and its increasing role in economy, also influenced ways of use of money to resolve various tasks. Originally with the application of full valued money, the great attention was paid to the examination of commodity nature and an origin of the money, which possess own cost and possibility to be used for an estimation of the goods value and for an exchange for them. In the time of functioning of full valued money, a change of its quantity in the circulation didn’t have any noticeable effects on changes of price level.

It has been caused by the fact, that excessive amount of money in the circulation became treasures, and if was necessary reverted back to circulation. The adaptation of money supply to requirements of money turnover occurred without the state regulation. Therefore a change in the quantity of money in use didn’t involve attention of theorists and didn’t serve as object for theoretical researches. A rise in the interest to questions of the money theory was promoted by the active state policies in monetary sphere, especially in connection with the occurrence of inferior banknotes in money turnover.

A greater attention started to be paid to the impact of change in value of money in circulation on a price level and an increase of productions effectiveness. Such correlation of money has been reflected in the exchange equation: MV=PQ, where * M – is the total amount of money in circulation; * V – “speed” of money circulation; * P – the average level of the prices of commodity transactions; * Q – quantity (volume) of commodity transactions; In other words, the leading role in a price level establishment is played by quantity of active money.

It is the basis for the maintenance of the quantity theory of money according to which the price level in the final account is determined by quantity of active money in money turnover. The price level changes proportionally to change of the supply of active money. At the same time attentive acquaintance with the exchange equation generates more questions, than answers it is capable to answer. So, it is difficult to agree that the indicator of speed of money circulation (V) is characterized as stable though it can be specified as result of a correlation of two variables: the volume of realization (P) and quantity of money in circulation (M).

It is also important that the use of the exchange equation at a determination of the money supply, necessary for circulation and possibility to regulate this mass, is almost unreal. There are some considerable difficulties with the determination of an indicator of speed of circulation of money (V) considered to be a stable variable. For the calculation of this indicator, the data of a volume of the circulation and the amount of funds, serving such a turnover, is necessary. However the reception of the required data in modern conditions is rather complicated, as in turnover there is not only cash, but also money funds of cashless turnover.

To this respect, it is essential that non cash monetary turnover is made on settlement and loan accounts. But under such circumstances it is hardly probable to estimate cumulative value of balance of the money funds participating in turnover as the residues are registered as on settlement accounts (a liability), and on loan accounts (an asset). It is possible to advance many other arguments, indicating the complexity of determination of a size of separate indicators, included in the exchange equation, and of the limited value of interrelation and interdependence between them.

On the whole it appears that there is only one equation with many variables. At an estimation of the value of the exchange equation it is necessary to pay attention to the major lack, consisting of that, the determining influence on a price level is rendered by changes in quantity of active money, while actually changes of the prices to a sizeable degree are caused by changes of costs of the goods. Along with the quantitative theory there were also other sights at a nature, features and results of money functioning and its influence on a price level.

So, English economist A. Phillips, resting upon results of the conducted analysis came to a conclusion of the dependence of price level changes not on changes of quantity of active money, but from a level of employment of the population and corresponding to this level wages. Such interrelation has been formulated and named «Phillips’ curve». The economists, who share this view, agree that the growth of employment level and wages level increase is accompanied by a rise in prices, and on the contrary, with the wages level decrease prices decrease.

However it means, that it is not the quantity of active money, but changes in the level of the solvent demand determined by changes in the wages level, influences the prices. On the basis of the quantitative theory occurred other, sometimes contradicting to each other, scientific opinions about a role of money and its influence on economy’s development. In this respect it is necessary to mark out two directions: Keynesianism and monetarism. Both directions recognize the importance of the role of money and its influence on economic processes.

According to them it is considered necessary to carry out events maintain an optimum quantity of money in circulation. Keynesian and monetarism approaches differ mainly in that measures at the Keynesian approach are directed on strengthening of the role of money in demand stimulation while at monetarism – on stimulation of restrained demand in comparison with the product supply. Supporters of Keynesianism stick to active participation of the state in the adjustment of volume of active money and prefer measures on reasonable increase in the quantity of money in circulation, to employment and business activity stimulation.

Such measures can promote not only to production growth under certain conditions, but also to an inflation development. It assumes a necessity in well-considered measures on increase in quantity of active money. Other position is typical for monetarists. Recognizing a role of money and a presence of its optimum quantity in circulation, they count on, that under conditions of market economy, on one hand, the quantity of active money is subject to self-regulation; on the other – it also matter the constraining influence of the state on the volume of active money.

Here, it is important, that a reasonable reduction in the quantity of active money stimulated the strengthening of an interest in the reception of money, and accordingly a product supply growth. Thus there is no way to ignore possible difficulties with the realization of goods with the limited quantity of money in circulation. Conclusion So, all types of money, being a means of expressing the value of the goods, carry out this function which acts as general property of money, irrespective of those shapes they transform in the course of its evolution.

Application of money as a value measurement allows a value of the goods to be expressed in the form of its price. Historically a price in the form of tradable commodities in commonly accepted ratio arises and develops in the market even before the occurrence of money. The reason for the occurrence of money also consists in the necessity to allocate a universal number of ratios in a set of mutual exchange ratios in which all goods are interdependent. In this universal ratio all transactions are made under a single “denominator”.

A starting point for the evaluation of other goods becomes the value of one commodity, which spontaneously emerged from a market to fulfill its role of becoming money. The key point for the analysis of the theory of money is a general accepted view of a role of money in the development of economy and necessity of adjustment of volume of active money. However distinctions between treatments of Keynesian and monetarism approaches offer different unequal measures for the adjustment of quantity of money in circulation with the purpose to stimulate an uninterrupted operation of production volume growth and goods realization.

But none of recommendations can be considered the only right one. It calls forth a necessity of development and realization of a reasonable monetary and credit policy which can change according to features and goals of economy development during various periods. The list of references 1. ???????? ?. ?. ????? ????????????? ??????. 2005. 2. ??????? ?. ?. ????????????? ??????: ?. , 2002. ???????? ?. ?. , ????????? ?. ?. ????? ????????????? ??????. 2005. 3. ????? ?. ?. ????? ?????? ????? ? ???????. ?. , “????? ? ?????”, 2003. 4. ??? ????????????? ??????: ??????? / ??? ???. ???????? ?. ?. , ????????? ?. ?. – ?????, 2003. 5. ??????????????: ??????? / ??? ???. ????????? ?. ?. – ?. , 2002. 6. ????? ?????? ????? ? ???????: ??????? / ??? ???. ?????? ?. ?. – ?. , 2001. 7. ??????? ?. ?. , ?????????? ?. ?. ?????? ????????? ????????? ? ???????. ?. , “?????-?”, 2006. 8. ?????????: ??????? / ??? ???. ???????? ?. ?. – ?. , 2004. 9. The History of Money, Jack Weatherford, 2009 10. Analysis Of The Functions Of Money by William Morris Stewart, 1898 ——————————————– [ 2 ].

Velocity of circulation – is the average frequency with which a unit of money is spent in a specific period of time. [ 3 ]. Unit of account (Money of account) – is a standard monetary unit of measurement of value/cost of goods, services, or assets. [ 4 ]. Cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds [ 5 ]. G-M – the exchange of goods for money. [ 6 ]. M-G – the exchange of money for goods. [ 7 ]. Money goods – money in the form of some commodity. 8 ]. Treasure (Ec. ) – accumulated or stored wealth in the form of money, jewels, or other valuables. [ 9 ]. Foreign exchange reserve – deposits of a foreign currency held by a central bank. [ 10 ]. Hard currency – a globally traded currency that can serve as a reliable and stable store of value and which is freely convertible. [ 11 ]. Rate – the relation of the currency of the given country to currencies of other countries [ 12 ]. Purchasing power – is the number of goods/services that can be purchased with a unit of currency.

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