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. For example, the traders are interested in the wholesale value of money; the consumers are interested in the retail value of money; the producers are interested in the labour value of money. So, we can say that the absolute value of money cannot be measured.


In reality, it is the relative value of money which is of significance. What is needed to be measured is the change in the value of money over a period of time rather than the value of money at a given moment of time. An individual is interested in Knowing whether the purvhpurch power of Money has risen or fallen over a period of time; and also to what extent. This can be known by measuring changes in the value of money from time to time. Thus the value of money is important only in the relative sense.

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