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Changes In The Value of Money

 Changes In The Value of Money

Meaning - Value of Money

            The value of money means the purchasing power of money over goods and services in a nation. Therefore, terminology “Value of Money” is a relative concept which articulates the association amidst a unit of money and the goods and services that can be acquired with it. This shows that the value of money is associated to the price level for the reason that goods and services are purchased with a money unit at given prices. But the association amidst the value of money and price level is a converse one.

Illustration 51

Calculate the measure of change in the value of money with the below data.

Year

Wholesale Price Indices (P)

2005-2006

200

2006-2007

180

2007-2008

260

2009-2010

300

Solution

Year

Wholesale Price Indices

% change in Price level (% ΔP)

% change in the value of money (%ΔVm)

2005-2006

200

-

-

2006-2007

180

-20

+20

2007-2008

260

+60

-60

2009-2010

300

+100

-100

Measurement of Changes in the Value of Money

To measure the value of money in a relative sense, all can be done is to compare its purchasing power of one phase with its purchasing power of another phase. Variations in the value of money are by the variations in the general level of prices over a period of phase.

Variations in diverse sets of prices can be evaluated by modes of an arithmetic tool known as “price index numbers”. An index number of the price is a presentation screening the height of average prices at one point comparative to their height at some other point that is taken as the base period.

Base year price index is regarded on a standard model of 100. Price changes and the subsequent variations in the value of money are therefore, considered as a percentage change.

The value of money varies in converse ration to the deviation in the trend of price over a given phase of moment.

Illustration 52

Below given tablet represents the prices of two diverse years. You are required to ascertain the following:

  1. Relative price proportion
  2. The index number of the year 2010

Article

Price in year 2005 per unit in $

Price in 2010 per unit in $

I

24

30

II

45

72

III

80

120

IV

8

10

Solution

Article

Price in year 2005 per unit in $

Price in 2010 per unit in $

Price Relatives
Calculation

Value
In $

 

P0

P1

  1 =   P1  x 100
           P0

 

I

24

30

    30  x  100
     24

125

II

45

72

    72  x  100
    45

160

III

80

120

    120  x  100
     80

150

IV

8

10

    10  x  100
     8

125

     

ΣI = 560

Index number of the current year       =        ΣI
                                                                        N

Where, Σ denotes the sum, I for the price relatives and N represents the number of items.

Therefore,
                        Index number of 2010            =          560      =          140
                                                                                      4
In the above illustration, we have presumed that all items are of equal significance. This may not be so. Therefore, in order to count the disparity amidst each item, it becomes requisite to assign weights to them. Then a weighted average of price relatives is to be compared.

Index numbers are constructed to measure the behaviour of diverse kinds of price averages. The most commonly used indices are of:

  1. The general level of prices of all goods, services and securities sold for money
  2. Retail prices of consumer goods
  3. Wholesale prices and
  4. The cost of living

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