Value of Money: Meaning & Measurements in Economics

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Meaning of Value of Money

The value of money (TVM) is the perception attributed to money at a given time taking into account economic circumstances that influence it, such as inflation.

Value of Money
Value of Money

The economy is in constant change, placing money as the fundamental axis of its operation. That said, money itself also experiences variations or modifications in its value in response to various economic circumstances.

Concepts such as purchasing power or purchasing power are closely linked to this value. Making, in this way, that the money is seen or perceived at all times taking into account its translation or usefulness in the economic environment.

Money, whether in the physical form of coins and bills or in a virtual or electronic way, is the main payment tool around the world.

For centuries it has been a fundamental pillar of the international economic map and has replaced other commercial exchange mechanisms such as the barter system or economies based on the possession of precious metals.

Influential Elements in the Value of Money

A remarkable characteristic of money is that its value is fickle and is determined by various factors.

Economic events in the variations of the value of money would be:

  • Inflations and devaluations caused by a multitude of economic causes. Usually the variation of prices is the main influencing cause in the calculation of the value of money.
  • Appearance of new technologies and telecommunications that translate into significant changes in the economic environment.
  • Following the above, productivity and the ability to obtain competitive advantages.
  • Changes in the preferences or uses of societies significantly affect the value of money.
  • The level of reserves a country has.
  • The role of political decisions and macroeconomic entities, such as central banks and their decisions regarding interest rates.
  • The issuance of money and the increase in the monetary mass of a territory.
  • Other educational and ideological factors of each society, as well as its more or less saving or investing behavior.

Along with these circumstances, another factor would go hand in hand: time. Investments and finances base their operation on the study of these contingencies.

Value of Money vs. Price of Money

The value of money is often confused with the concept of the price of money. The simplest example of this statement is a 1 euro coin, which can be exchanged for more or less purchases depending on the moment.

That is, £1 in 2020 can be exchanged for a liter of milk, while in 2001 it could be exchanged for two liters. There has been inflation, therefore the value of that euro if we understand it as purchasing power.

As a result of the study of the evolution of the value of money and exchange rates, together with their translation into different currencies or world currencies, there is a specific speculative market: the foreign exchange market.

A theory derived from all the above and to take into account is that of  purchasing power parity.

For its part, the price of money usually makes references to interest rates. That is, at the price of buying money. Or put more correctly from an economic point of view, the cost of borrowing.