What is Near Money? | Difference between Money and Near Money

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Hi friends, in today’s article we are going to know about near money and also know the difference between Money and Near Money. So let’s discuss in details.

What is Near Money in economics?

Near money is an economic term describing non-cash assets that are highly liquid but not 100%, such as bank deposits, certificates of deposit (CDs) and treasury bills. In other words, Near money refers to assets that can be quickly converted into cash. Near money is also called quasi-money.

Types of Near Money

The following assets can be considered as near money –

Bill of Exchange – Bill of exchange is a promise to pay a specified sum of money on a specified date, generally after three months or 90 days. Bill of exchange may be treasury bills or commercial bills or financial bills.

Bond – Bond is an instrument of borrowing for relatively long periods. The promise to pay a fixed sum of money by way of interest annually for a specified number of years and to repay sum borrowed at the end of the.

Equity shares – The firms in order to run their business sell their shares. The public purchases such shares. The share holders do not get the fixed amounts against their shares. Rather, they have to share their profits or loss of the company whom shares they are having.

Fixed and Saving deposits – People deposit their savings in fixed and saving accounts. Such types of amounts can not be withdrawn from banks before a particular period of time and heavy interest is paid against them.

Difference between Money and Near Money

The difference between Money and Near Money are given below –

Money Near Money
(i) Money consists of coins currency notes and demand deposits of the bank. (i) But, near money includes the financial assets like bill of exchange, bonds, time deposits, share, etc.
(ii) Money is the legal tender. (ii) But, near money assets do not have similar legal status.
(iii) Money possesses 100% liquidity that is it is perfectly liquid or can be readily acceptable as a means of payment. (iii) Whereas, near money does not possesses 100% liquidity, i.e. it involves time cost for its conversation into money.
(iv) Money serves as a common measure of value or unit of account. Prices are expressed in terms of money. (iv) But, near money does not performs such functions, rather it own value is expressed in terms of money.
(v) Money is directly used for making the transactions. (v) On the other hand, near money is an indirect medium of exchange, it has to be first convert into ready money and then it used for transactions.
(vi) Money is not an income yielding asset. (vi) But, near money assets are income yielding assets.

Significance of Near Money

Following are the main importance points of role or significance of near money –

Broader definition of Money – The existence of near money has broadened the definition of money. In the transactions approach, money is defined as to include only legal tender money and bank money. On the other hand, in the liquidity approach, the definition of money includes – (i) Bank money, (ii) Legal tender money and (iii) near-money, i.e. all those financial assets which can be easily and inexpensively converted into money proper within a short period of time.

Policy Implications – Near-money has important policy implications for the monetary authorities. The popularity of near-money assets significantly increases the overall level of liquidity and hence the level of aggregate expenditure.

Spending and Consumption – The quantity and stock of near money directly affects the spending and consumption volume of the economy.

Increase in Velocity of Money – Near-money influences the velocity of money. A person’s ability to spend depends not only on the amount of money he has with him and he holds in the bank, but also on his ability to rise additional funds by selling his near-money assets.

Inflationary Trends – Quantity of near money and their conversion directly affects trends of economy. If during boom period of time, people converted their near-money in perfectly liquid money, then this will increase the spending and will lead to inflation in the economy.

Conclusion

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