CBSE Class 10 - Economics - Money and Credit - Concept Points (#eduvictors)(#cbseNotes)

Economics - Money and Credit
Concept Points

✱ Money is anything which is commonly accepted as a medium of exchange and in discharge of debts.

✱ People exchange goods and services through the medium of money. Money by itself has no utility. It is only an intermediary. The use of money facilitates exchange.

✱ Direct exchange of goods against goods without use of money is called barter exchange (i.e. exchange of goods for goods). This is also known as CC economy (i.e. commodity for commodity economy).



✱ Simultaneous fulfillment of mutual wants by buyers and sellers is known as double coincidence of wants. The double coincidence of wants is the major drawback of the barter system. It can be very difficult to find a person who can fulfill this condition. Let us understand this concept with the help of an example:

❝A shoe manufacturer wants to sell his shoes in the market and buy wheat. Now he has to directly exchange shoes for wheat without the use of money. He would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy shoes in exchange.❞

✱ Before the introduction of coins, a variety of objects were used as money. For example, since the very early ages, Indians used grains and cattle as money. Thereafter came the use of metallic coins–gold, silver, copper coins. This process was finally taken over by the paper money (which means currency notes). As the volume of transactions increased, even paper money started becoming inconvenient because of time involved in its counting and space required for its safe keeping. This led to the introduction of bank money (credit money) in the forms of cheque, demand drafts, credit cards etc.

✱ Money as a Medium of Exchange: The use of money spans a very large part of our everyday life. Several transactions involving money are made in any single day. Goods are being bought and sold with the use of money. Services are being exchanged with money. Money is sometimes paid as advance with the promise of delivery of goods later.

✱ The major function of a bank is to give loans, particularly to businessmen and entrepreneurs and thereby earn interest.

✱ Banks get money for providing loans by accepting the deposits from people. Deposits are the lifeline of a bank. These are of two types : time deposits and demand deposits. Time deposits can be withdrawn only after a specified period of time. Demand deposits in the bank can be withdrawn on demand by issuing cheques.

✱ The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash.

✱ Credit (i.e. giving loans) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payments with interest.

✱ Suppose that the bank decides to lend some of your deposits to another customer. It could give a loan to a business. This loan is an example of credit.

✱ Credit plays a vital and positive role in the society. This can be explained further with the help of a suitable example. Saleem obtains loans to meet the needs of production. The credit helps him to meet the need of ongoing expenses of production, complete production in time and thereby increase his earnings.

✱ Sometimes, credit, instead of helping people, pushes them into a debt trap.
In Swapana’s case who is a farmer, the failure of crop made loan repayment impossible. Credit in this case pushes the borrower into a situation from which recovery is painful.

✱ Terms of credit include interest rate, collateral and documentation requirements and the mode of repayment. The terms of credit may vary depending on the nature of the lender and the borrower.

✱ Collateral is an asset that the borrower owns (such as land, building, vehicles, livestock etc.) and uses this as a guarantee to the lender until the loan is repaid.

✱ Formal credit is generally available with the banks and cooperatives. They charge lesser rates of interest than informal institutions. The Reserve Bank of India (RBI) supervises the functioning of formal sources of loan.

✱ Informal lenders include moneylenders, traders, employers, relatives and friends etc. They charge much higher interest on loans. There is no one to stop them from using unfair means to get their money back. There is no organisation which supervise the credit activities of lenders.

✱ The idea behind Self-Help Groups is to organise the rural poor into self-help groups and collect their savings. Saving per member varies from Rs 25 to Rs 100 or more depending on the ability of the people to save. Members can take small loans from the group itself to meet their own needs. The group charges less rate of interest on these loans. If the group is regular in savings, it becomes eligible for availing loan from the bank.