We have discussed earlier that the main role of money is to facilitate exchange. Money is accepted as a media of exchange because it has value. It is held as a store of value because it has value. The value of money has significant importance in the study of economic problems. By value of money is meant its purchasing power, its capacity to command goods in exchange for itself. Money as we know is not needed for its own sake but for the goods and services it can purchase.
If money buys more commodities than it did at same time, we say the value of money is high and if it buys less, the value of money is said to be low. Thus the real value of a unit of money at a given time and place is the quantity of goods and services of all kinds that can be purchased with a unit of money. The value of money varies inversely with the general level prices. When the general prices increase, the value of money falls and when general prices decrease, the value of money rises. In mathematical terms the value of money and the general level of prices are reciprocals of each other.
If money buys more commodities than it did at same time, we say the value of money is high and if it buys less, the value of money is said to be low. Thus the real value of a unit of money at a given time and place is the quantity of goods and services of all kinds that can be purchased with a unit of money. The value of money varies inversely with the general level prices. When the general prices increase, the value of money falls and when general prices decrease, the value of money rises. In mathematical terms the value of money and the general level of prices are reciprocals of each other.