Ch207 - UNIT-IV MONEY AND BANKING CHAPTER 7 AND MONEY...

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M ONEY AND B ANKING UNIT-IV
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she was most proficient. This specialisation would result in a supply of goods and services of the best possible quality under the circumstances. The need would then arise for each one to exchange his or her good or service for the goods and services of the others. How would they exchange the goods and services? The simplest possible method would be to directly exchange one commodity for another. This exchange of ‘goods for goods’ is called barter exchange . In the above limited context of exchange between only eleven people, barter exchange could take place with minimum loss of time and effort. Let us call this economy the C-C economy , i.e. commodity for commodity exchange economy. As the group becomes larger and larger, problems begin to emerge with this direct exchange of goods for goods. The larger the group, the greater will be the trading costs of barter exchange. Trading costs are nothing but the cost of engaging in trade. There are two components of trading costs. One is the search cost – the physical cost of M ONEY AND B ANKING C HAPTER 7 Money plays an important role in the economic system — we see the use of money at every step of life — indeed it would be hard to imagine life without money! The main function of money in an economic system is to facilitate the exchange of goods and services, i.e. to lessen the time and effort required to carry on trade. Imagine Robinson Crusoe living alone on an island. He produces all the goods and services he requires for his consumption. Of what use is money to him? He cannot eat it, wear it or use it to exchange goods and services with others — remember he is alone on the island. Now suppose that he is joined on the island by ten of his friends. All eleven of them would be engaged in the production of the goods and services they require for their consumption. It is likely that each one of them would be proficient in the production of one particular good and only average in the production of the others. It would be advantageous to the group as a whole if each one specialised in the production of the good or service in which he or
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M ONEY AND B ANKING 91 searching for a person willing and prepared for the exchange of goods (it can be thought of as the opportunity cost of not producing more goods in the time spent searching, or it may be thought of as the cost of the deterioration in the good and its adverse effect on its desirability during the time spent searching). The second component is the disutility of waiting as perceived by the individual during the search period. More time and effort will have to be spent in searching for the person who both needs the good you have more than anything else and has the good that you need more than anything else, simply because there are now more people to canvass. The longer you spend searching for such a person, the greater will be the search cost.
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Ch207 - UNIT-IV MONEY AND BANKING CHAPTER 7 AND MONEY...

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