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Difficulties in measuring changes in value of money

 (A) CONCEPTUAL DIFFICULTIES (1) Vague concept of value of money:- The concept of Money is vague, abstract and cannot be clearly defined. The value of money is a relative concept which changes from person to person depending upon the type of goods on which the money is spent. (2) Inaccurate measurement:- Price index number do not measure the changes in the Value of Money accurately and reliably. A rise or fall in the general level of prices as indicated by the price index number does not mean that the price of every commodity has risen or fallen to the same extent. (3) Reflect general changes:- Price index number are averages and measure general changes in the Value of Money on the average. Therefore, they are not of much significance for the particular individuals who may be affected by the changes in the actual prices quite differently from that indicated by the index numbers. (4) Limitations of wholesale price index:- the wholesale price index numbers, which are generally used t...
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Steps of construction of price index number

  The construction of the price index numbers involves the following steps or problems: 1. Selection of Base Year: The first step or the problem in preparing the index numbers is the selection of the base year. The base year is defined as that year with reference to which the price changes in other years arc compared and expressed as percentages. The base year should be a normal year. In other words, it should be free from abnormal conditions like wars, famines, floods, political instability, etc. Base year can be selected in two ways: (a) through fixed base method in which the base year remains fixed; and (b) through chain base method in which the base year goes on changing, e.g., for 1980 the base year will be 1979, for 1979 it will be 1978, and so on. 2. Selection of Commodities: The second problem in the construction of index numbers is the selection of the commodities. Since all commodities cannot be included, only representative commodities should be selected keeping in view ...
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Measurement of changes in value of money

 The value of money does not remain constant over time. It rises or falls and is inversely related to the changes in the price level. Changes in the general level of prices can be measured by a statistical device known as INDEX NUMBER. MEANING Index number is a technique of measuring changes in a variable or group of variables with respect to time, geographical location or other characteristics. In this context we are concerned only with Price index number, which measures changes in general price level (or the value of money) over a period of time. Price index number indicates the average of changes in the prices of representative commodities at one time in comparison with that at some other time taken as the base period. According to L.V. LESTER," An index number of prices is a figure showing the height of average prices at one time relative to their height at some other time which is taken as the base period." TYPES OF INDEX NUMBER Index number are of six types. They are:- ...
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Value of money and price level

 The concept of Money is closely related to the prices of goods and services. Since, money itself is used as a unit of account and as a measure of value of all other things, its own value can be seen only through the prices of other things.  The value of money thus depends upon the prices of goods and services to be purchased with money. The higher the price level, the smaller will be the purchasing power of Money and the lower will be the value of money; the lower the price level, the greater will be the purchasing power of Money and the higher will be the value of money. Hence, there exists an inverse relationship between the prices level and the value of money. RELATIVE AND ABSOLUTE VALUE OF MONEY In practice, it is neither possible nor desirable to measure the absolute value of money. It is almost impossible to take into account the prices of all the commodities that are exchanged. People are interested not in the aggregate price level, but in the sectional price level. Fo...
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Concept of value of money

 MEANING By the term '' Value of Money" we mean the purchasing power of Money or its buying capacity. It refers to number of goods and services which a unit of money can buy. The larger the amount of goods and services is bought by money, the greater will be the value of money. Thus we may conclude that there is a direct relationship between quantity of goods bought and value of money. According to KEYNES, " Money, as such has no utility except what is derived from its exchange value, that is to say, from the utility of the things which it can buy." STANDARD OF VALUE OF MONEY (1) WHOLESALE STANDARD:- According to this standard, the value of money is expressed in terms of all those commodities which are traded in the wholesale market. This standard is preferred because the wholesale prices are recorded regularly and are easily available. (2) RETAIL STANDARD:- Under this standard, the value of money is expressed in terms of retail prices, i.e. in terms of the price...
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