Dynamic and Static Role of Money in the Modern Economy

DYNAMIC AND STATIC ROLE OF MONEY IN THE MODERN ECONOMY

STATIC ROLE OF MONEY

The Static aspects of money refer to the traditional, conventional, fixed, technical and passive functions of money. Such functions only help to regulate the economy; they do not infuse any element of dynamism into the system. These include the primary and secondary functions of money which include:

 Money as a medium of exchange.

Money is a common medium through which goods and services are exchanged. In ancient days, the barter system was used which proved to be difficult and inconvenient for people. Money came into existence and removed the difficulty of the barter system and today, it is used to facilitate transactions.

 Money as a unit of account.

Money becomes a common measure of value. Money is the standard of measuring value and value expressed in money is price.

 Money acts as a standard of deferred payments.

Under the barter system, it was easy to take loans in cows or grains but difficult to make repayments in such perishable articles in the future. Money has simplified both taking and repayment of loans because the unit of account is durable, stable and generally acceptable. It also overcomes the difficulty of indivisibility of commodities.

 Money as a store of value.

Money removes the problem of storing of commodities under barter. Money being the most liquid asset can be kept for long periods without deterioration or wastage.

 Facilitating the transfer of value from one place to another.

A person can transfer his money through draft, bill of exchange, etc. and his assets by selling them for cash at one place and buying them at another place. Because of its general acceptability and the merit of liquidity, money can be easily transferred from one place to another.

DYNAMIC ROLE OF MONEY

Dynamic Aspects of money refer to those functions of money which impart dynamism to the economy; that is ensuring stability of price levels as well as to improve the level of income and employment.

Dynamic Aspects include increasing the liquidity of capital and serving as the basis of credit. In order to tackle the problems of inflation and deflation, the government in its formulation of the monetary policy takes into account the dynamic functions of money alone. The principal dynamic functions are:

Money creates the situation of inflation or deflation through changes in the price level.

Distribution of national income among different factors of production. Money facilitates full utilization of the natural

...