“You will never know the value of money until you work hard for every cent.”

“You will never know the value of money until you work hard for every cent.”

Value of Money

Value of money means the purchasing power of money over goods and services in a country. What a rupee can buy in Pakistan represents the value of money of the rupee. Thus the phrase, “value of money” is a relative concept which express the relationship between a unit of money and the goods or services that can be purchased with it. If money, buys more commodities then the value of money is high and if it buys less, the value of money is said to be low.

The value of money is of two types. The internal value of money and the external value of money. The internal type of money refers to the purchasing power of money over domestic goods and services. The external value of money refers to the purchasing power of money over foreign goods and services.

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Causes of Changes in the Value of Money

• Quantity of Money:

If quantity of money is increased in a country then prices start rising in the country. Due to increase in prices, the purchasing power of decrease which means fall in the value of money. On the other hand, if quantity of money is decreased in a country then prices start falling in the country. Due to decrease in prices, the purchasing power of money increase which means rise in the value of money.

• Production of Goods and Services

Value of money is affected by production of goods and services. When there is increase in the quantity of goods and services, the price level start falling which causes to increase the purchasing power of money and value of money increases. When there is decrease in the production of goods, the price level starts rising which results in decreasing the purchasing power of money and value of money decrease.

• Velocity of Money

Velocity of Money refers to speed with which unit of money moves from hand to hand. More speed indicated high velocity of money. If unit of money does not move from hand to hand then velocity of money is low, High velocity of money causes to increase in the quantity of money, which decrease in the quantity the value of money. Low velocity of money results in decrease in the quantity of money. Due to decrease in the quantity of money, value of money increase.

• Increase in Population

If the productions of a country increase without corresponding increase in the production of goods and services then demand of goods and would rise. This would cause increase the price level and decrease the purchasing power of money. As a result, value of money decrease.

• Increase or Decrease in Demand

If demand of goods increase or decrease due to some uncertain circumstance, value of money changes. For example, demand of goods increases in case of war, flood and famine etc. Thus, prices start rising and value of money decrease. On the other hand, if there is decrease in the demand of goods then the prices start falling and value of money increase.