MEANING OF PUBLIC FINANCE

Public finance is a study of income and expenditure or receipt and payment of government. It deals the income raised through revenue and expenditure spend on the activities of the community and the terms ‘finance’ is money resource i.e. coins. But public is collected name for individual within an administrative territory and finance. On the other hand, it refers to income and expenditure. Thus public finance in this manner can be said the science of the income and expenditure of the government.

Different economists have defined public finance differently. Some of the definitions are given below.

According to prof. Dalton “public finance is one of those subjects that lie on the border lie between economics and politics. It is concerned with income and expenditure of public authorities and with the mutual adjustment of one another. The principal of public finance are the general principles, which may be laid down with regard to these matters.

According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure”

To sum up, public finance is the subject, which studies the income and expenditure of the government. In simpler manner, public finance embodies the study of collection of revenue and expenditure in the public interest for the welfare of the country.

KINDS OF MONEY

Kinds of money are also known as forms of money. Money can be classified into various parts. On the basis of its evolution, there are following kinds of money.


COMMODITY MONEY

In the days of human civilization, human society had used each and every commodity like, cattle and their bones and leathers, food grains etc as money. The commodity which used as money is called commodity money. The commodity money lakes the basic feature of good money such as uniformity, stability durability, and transportability.


2. METALIC MONEY

Money made from metal like gold, silver, copper, brass is called metallic money. This money possesses quality of good money. The metallic money is of following types.


a. STANDARD OF FULL-BODIES COINS

The money made up of superior metals gold, silver etc with definite weight, value and purity is called standard or full body’s coins. The face value of such money is supposed to be equal to its intrinsic value. Its value does not fall when it is sold after melting.


b. TOKEN OR SUBSIDITY COIN

The money made of inferior metals like iron, copper, brass etc is called token or subsidiary money. The face value of token money is higher then the intrinsic value. Its real value disappears if it is melted. It holds nature of limited legal tender.

3. PEPER MONEY

The money issued by the central bank or monetary authority of the country in the form of paper notes is called paper money. The paper money was first invented in china in 18th century. Such money possesses higher face value than its intrinsic value. The paper money is widely used through the world.


a. REPRESENTATIVE OR CONVERTIBLE PAPER MONEY

Paper money that represents precious metals is known as representative paper money. They serve as a substitute of gold and silver to user. They hold cent percent reserve in the central bank or monetary authority of the country. It is difficult to issue money because all money should keep gold and silver reserve. It is also known as convertible paper money because; they can be converted into gold and silver easily in cash of need.


b. FIAT OR INCONVERTIABLE MONEY

The money issue by the central bank without cent percent gold and silver reserve is called flat money. Its face value is many time higher than the intrinsic value. It is issued by the state, so it has unlimited legal tender, but there is no legal provision to convert fiat money into gold and silver. Hence it is called non convertible paper money.


4. BANK OR CREDIT MONEY

The credit institution issued by the banks and finance companies, whose acceptance not obligatory, are known as credit or bank money. Credit instrument such as cheque, credit cards, debit cards, promissory notes, bills of exchange, draft, latter of credit etc are the example of credit money. It is also known as optional or non legal tender money.

VALUE OF MONEY

The value of money indicates purchasing power of money. It refers to the quality of goods and services that a unit of money can purchase unit of time. The purchasing power of money depends on the level of price of goods and services. Thus, it refers the buying and purchasing power of money. There is inverse relationship between the value of money and the price level. If price is high purchasing power of money is low. Similarly if price is low the purchasing power is high. There is positive relationship between value of money and its purchasing power. Higher the value of money, lower will be the purchasing power. Similarly, lower the value of money, lower will be the purchasing power. The relationship between the value of money and its purchasing power is exactly proportional. Thus, in consumption, the value of money refers to the money to command or buy the goods and services.


According to Benham, “The value of money means the purchasing power of a unit of currency in general.”


In the word of Crowther, “The value of money is that what it mill buy”

Fisher define the value of money a “The purchasing power of money is the reciprocal of the level of prices”

DEFECT/EVILS OF MONEY

Modern world is moving with the wheel of money. Money is not only important in every aspect of human life; it is also evil. Money is a good servant but bad master. Hence it is referred as necessary evil. The main defects are as follows.


1. ECONOMICS INSTABILITY

The value or purchasing power of money doesn’t remain same. This fluctuation in value of money causes economic instability. Increasing in quantity of money reduce value of money and invite inflation which makes the reach richer and the poor poorer. On the other hands decrease in the quantity of money increase value of money and causes deflection which increase unemployment and hardship.


2. TRADE CYCLE

Money can cause Boom and Slump. During boom employment expand beyond full employment level and price goes very high. During slump unemployment increase and productivity capacity and investment deceases. This trade cycle is monetary phenomena i.e. causes by money.


3. INEQUALITY OF INCOME AND WEALTH

Money cause inequality in the distribution of income and wealth which divide the society into richer and poor and causes class conflict. It disturbed the social harmony.



4. DISCOURAGE CAPITAL FORMULATION

Money discourages the capital formulation because if there is inflection, money gives rich to speculative activity and attracts resources away from productivity channels. On the other hand, if there is deflection, the whole economy machine goes out of gear and spreads missing all rounds.


5. SOCIAL DISADVANTAGE


Money brings about social disadvantage. It has been responsible for decline of spiritualism, increasing greed, encouraging theft, robbery, prostitution etc. it also increases exploitation and large scale corruption in the modern society.

ROLE/ IMPORTANT OF MONEY

Money is the lubricant of an economy. Without money economic activities such as production, consumption, capita formation etc can not be performed. This shows that money is the life blood of an economy. Due to its quality of portability, divisibility, stability, acceptability and durability, it is regarded as the wheel of the economics’ system. Following are the role of money:


1. ON CONSUMPTION

The satisfactions can be obtained by consumption of various goods and services, which is measured by the help of money. Due to its purchasing power, people can satisfy their wants by purchasing different commodities with money.


2. ON DISTRIBUTION

Money is used in factors pricing. It is the phenomena of determining the price of factors of production, such as wage, salary, for labor, interest for capital, profit for origination and rent for land. Any producer can maximize the profit by using money.


3. ON PRODUCTION

In production entrepreneur has to compensate all factors of production for their contribution. Rent to land, wage to laborers, interest to capital, profit to enterprises has to pay and without money we can’t assess the exact compensation of factors of production.


4. CREDIT FACILITY

Money facilitates the environment of credit business in modern economy. It has made easier both lending and borrowing. Money is also used in standard of different payment.


5. MEASURING NATIONAL INCOME

National income of the country is calculated in terms of money which shows the standard of living of people. Without money measurement of national income can not be done because national income is money value of total outlay of a country within a year.


6. MONEY IN CAPITAL FORMULATION

Capital is scare and important factors of production. Money provides mobility to capital. Capital formulation is possible when there is an exact unit to measure the amount of the capita in the country. The process of the capital formulation in the modern economy is almost impossible without money.


7. SOCIAL ECONOMIC DEVELOPMENT

Money plays a signification role in social economic development. It is an effective means of mobilizing factors of production. Money facilities the development of social and physical infrastructure such as road, electricity, communication, school, hospital etc.

FUNCTIONS OF MONEY

* PRIMARY FUNCTIONS

Primary functions are the major function of the money which can be explained the following headings.


1. MEDIUM OF EXCHANGE

The primary and unique function of the money is to serves as the medium of exchange. It provides the economic freedom to the people. With the money people can sell or bye the product in the market. It also insures the purchasing power of the consumers.


2. MEASURE OF THE VALUE

Money serves as a common measure of value and standard unit of account. After the invention of the money, value of goods and services can be expressed in terms of currency of money. It has made the transaction easy and simplified the problem of measuring and compeering the price of the goods and services in the market. It also helps to calculate the macroeconomic indicators like NI, per capita income, GDP, GNP and Human Development indicators.


* SECONDARY FUNCTIONS

Secondary functions of money is less important then that of primary functions. This function are originated and derived from primary functions of money. Following are the secondary functions of the money.


1. STORE OF VALUE

Money serves as store of value of any goods and services in both short run and long run. In modern world people want to have some currency or coins in their pocket, home ,bank account etc to use anytime for the purchase of anything. The value of goods and services can be store in terms of money for many y due to quality of stability and durability. Money as the liquid store of value facilitates its owners to purchase any other assets in any times.


2. STANDERD OF DIFFERENT PAYEMENT


Lending and borrowing was the very difficult before the invention of the money, so that it was difficult to settle of lone. But due to different payment credit system become easy. With the help of money people can buy or sell goods and services only on commitment and payment can be made in the future in the form of installment. Money is regarded as the best transaction due to its quality of stability, accepting and durability. The future payment also possible through the help of money.


3. TRANSFER OF VALUE

Money also serves as the common tool to transfer the value of assets and income. Sale, purchase, mobilization and transfer if movable and immoveable property can also made with the help of the money. One can sell at one place and can buy them elsewhere. Value shift from one place to another because it transferred in terms of money.

DEFINITION OF MONEY

Money is anything, which is generally accepted as a means of payment and it possess liquidity. It is the king of means, which is printed and acceptable to all for buying and selling goods and services. In other words, it refers to that commodity which performs as the medium of exchange goods and services, measuring the value of factors of productions, goods / services, common and useful means of credit transaction in business society and having quality of store of value of goods / services in the form of cash.

In other words, it is anything which possesses hand to hand easily as mediums of exchange among people. Money has become so much a part of our day to day activities that we have started to talk it for garneted. The complex economy system stands on the base of money because money is something which generally acceptable as a medium of exchange.