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Monday, 21 November 2011

What is the role of money in a capitalistic economy and socialistic economy

Today money is considered one of the out standing inventions of the entire history of mankind. The introduction of money has eliminated all the difficulties of barter system in which goods have to be exchanged for goods. Money facilities trade by acting as a medium of exchange and standard of value. It has made easy to save wealth for future. It has played a significant role for the specialization in business through division of labour. Although money itself creates nothing but it is very helpful in the process of production, consumption and exchange.

1. Importance For Producer :-
The use of money enables entrepreneur to concentrate attention upon the technical problems of his business. Without money it is not easy for the producer to distribute product which is not divisible like "Bus" or motor car among the four factors of production.
The price mechanism controls the capitalistic economy. In a free enterprise economy many decisions like " What to produce , how to produce, where to produce and for whom to produce are guided by the profit motives. Money prices reflect the aggregates of individual demands and supplies."

2. Importance For Consumer :-
People can sell and buy the goods and services which they need by parting with money. In the absence of money a great variety of things would never have entered in our consumption list and our satisfaction would have been at the lowest level.

3. Exchange Transaction :-
The use of money has successfully removed the disadvantage of barter. Money has greatly stimulated the exchange of goods.

4. Distribution Of National Income :-
Every year we produce the certain amount of goods and services by combining the four factors of production. The reward of each factor like rent, wages, profit and interest is paid in terms of money.

5. Importance In The Field Of Public Finance :-
Money performs a valuable services in the field of public finance. The government can easily increase the revenue through the medium of money and can spend it for the betterment of the society.

6. Attainment Of High Level Of Production And Employment :-
If the money is properly managed, it ensures rising level of production, income and employment in the country.

A socialistic economy also can not operate smoothly and with maximum efficiency without money. After the revolution of 1917 in Russia, Govt. experimented for a short period with a moneyless system but it was found that the system could not work at all and it was given up soon after.

The basic feature of socialistic economy is that all means of production are owned and managed by state. The individuals can not possess profit earning properties. The operation of the economy is controlled by the state and not by the price mechanism. As a matter of fact-socialistic economy will remain a monetary economy. In a socialistic society persons would be paid money wages for their services. These wages would be used for the purchase of Govt. produced goods. Prices would be fixed by the Govt. which would ensure that total demand would be equal to the total supply. In order to determine the order of priority and for the selection of the most efficient and economical method for the production, the importance of various projects and costs of various methods of production must be determined. The calculations of such costs can only be made in monetary terms.

"The entire structure of capitalistic economy would collapse if you withdraw money. If all the money suddenly disappear from the economy the wheels of economy would halt."

"That money is pivot around which economic science clusters."

In the short not only is the use of money necessary for a capitalistic economy but even for a socialistic economy as experience shows it is indispensable.


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