Q: what is the importance of near money? Differentiate b/w money and near money?

 

INTRODUCTION

 

Strictly speaking money includes the currency notes and coins which are legal tender and perfectly liquid. However besides these, there are number of other assets that can be converted into cash with reasonable certainty and without loss such assets are called “NEAR MONEY”

Definition 1: –

“The assets which can be easily and quickly converted

into money without loss are called Near money”.

 

Definition 2: –

“The assets having ready sale market are Near money”

 

Examples of Near Money:

  1. Demand deposits (i.e. cheques, drafts).
  2. Bonds
  3. Govt securities,
  4. Debentures
  5. Bills of exchange
  6. Fixed deposits
  7. Treasury bills
  8. Insurance Policies etc.

 

All these types of assets have a market and are negotiable so that they can be converted into real money very quickly.

 

Explanation;  

Near money is that money which can be converted into actual money for making payments. It cannot be used directly for purchase of goods and services. Whenever there is need for money such assets are convertible into actual money.

 

IMPORTANCE

 

Near money hold a great importance in the monetary setup, which can be explained as follows.

 

  1. Effect the Spending Consumption:

The quantity of near money directly affects the spending & consumption volume of the economy. When the amount of near money is high this means people have less liquid money so they spend less.

 

  1. Important for Economic Policies:

Near money are important determinant of economic policies. If there are inflationary trend in the economy, govt increases the interest rates. This directs people to convert their cash in near mone}’ to gain interest. This will reduce the cash holdings and help to decrease inflation.

 

  1. Income Earning: –

A characteristic of near money is that mostly they are interest-earning

assets.

 

  1. Use as Security:-

Near money are also used as security to obtain loans and credits from banks and other financial institutions. Banks also grants loans against investment in different deposit schemes.

 

Difference between Money and Near Money

 

Money                     Near Money

1.   Difference by definition:

Anything that is1 generally acceptable as a medium of exchange & at the same time acts as a measure and .store, of value is called Money.

2.      Content:

Money includes currency Notes, coins and demand deposits.

3.      Liquidity:

Money is perfectly liquid

 

4.      Legal Tender:

Money (currency-coins) is legal tender money.

 

5.       Income Earning:

Money yields no interest or revenue to holder.

 

6.       Standard Unit

Money is a standard unit. All prices, debts, amounts are stated in money terms.

 

7.       Safety Motive:

Money do not serve as a margin of safety motive.

 

 

 

1. The assets which can be easily and quickly converted into money without loss are called Near Money

2. Near money includes fixed deposits,  Bonds, securities bills of exchanges, Treasury bills, Debentures, Demand deposit etc.

3. It can be used as money but it is not perfectly liquid.

4. It is not legal tender money.

 

5. Income is earned on near money in the form of interest.

6. It has no power to act as a standard unit.

 

7. Money serves as a margin of safety motive.

 

CONCLUSION

 

Summing up “Money” consists of currency bank deposits. It is a legal tender and gives the possessor liquidity in hand. Where as “Near money” consist of Bills of exchange, bonds, securities etc. They can be converted into near money within a short period of time but do not have the status of legal tender money.

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