Internal Value of Money
More often than not, the value of money is usually determined by many commodities a single unit of the money can purchase. The purchasing power of money over goods and services is referred to as the value of money. The value of money is categorized into the internal and external value of money. The internal value of money refers to the purchasing power of money over domestic goods and services or otherwise the buying capacity of money. The prices of goods and services are closely related to the value of money; the greater the quantity of goods and services bought by a unit of money, the greater the value of money. Conversely, the lesser the quantity of goods and services bought by a unit of money, the lesser the value of money. This paper is set to discuss the interval value of money, some of the factors that affect it and its significance.
First and foremost, the quantity of money in a given economy is the main determinant of the value of money in that economy as explained by the quantity theory of money. The theory illustrates that a change in the quantity of money in an economy results in a proportionate change in the value of money. Moreover, the quantity of money is directly proportional to the price levels in the economy. The theory further explains that the value of money changes inversely with the quantity of money present. For instance, when the quantity of money in an economy is doubled, the value of money will be halved but the price level also doubles. In the same vein, the price level will be halved when the quantity of money is halved, but the value of the money in the economy will be doubled.
Economic growth is another factor that determines the internal value of money in a given economy. A region’s economic growth boosts its internal value of money. A strong economic growth comes along with an increase in the demand for goods and services plus an increase in job opportunities and rooms for investments. In such economies where people feel wealthy, inflation goes hand in hand with economic growth while interest rates for borrowing increases. This factors combined to increase the interval value for money. Stagflation is common in regions where inflation rises in a stagnant economy, the value of money in such regions weakens to lower levels.
The value of money in an economy is significant in some ways. Small units of currencies with high values tend to buy large quantities of goods and services as opposed to currencies with low values. The high internal value of money gives the consumers a high purchasing power. In countries where there is inflation, the values of goods and services in such countries are very high, and therefore consumers carry large amounts of money even when going to buy very small quantities of goods and services.
In conclusion, money is an important economic tool for most transactions in the modern world. The value of money, on the other hand, determines the quantity of goods and services sold by a single unit of the currency. According to the quantity theory of money, the quantity of money supplied in the economy determines the value of money; the price levels are also proportional to the quantity of money supplied. The lesser the quantity of money supplied in the market the greater the value of money and vice versa. Economic growth, inflation, and interest rates on charged on borrowed money are key determinants of the internal value of money.