Engineering Economics

Unit 4
UNIT 4
• Evolution of Money
• Function of Money
• Inflation and Measures to control it
• Banking
• Banking structure in India
– Commercial and central banking in India
History of Money/stages of development of money
Bartering Digital Age
• (Prehistoric • (Late 20th
times around century 1990s
9000 BCE to onward)
3000 BCE)
Cryptocurrencies
Commodity Plastic • (2009 to
as Money Money present)
• (Around 3000 • (20th century
BCE to 1000 -1950s
BCE) onward)

Metallic Paper Money

Money • (Around 7th
• (Around 1000 century CE to
BCE to 1600 the present)
CE)
 What is Barter System?
•The barter system refers to the system of trading goods or services, between two or
more parties without the use of money or other monetary medium. Bartering involves
the provision of one good or service by a given party in return for another good or
service from another party.

•Bartering is the exchange of goods and services between two parties without the use of
any monetary medium.

•It is one of the oldest forms of exchange and commerce.

Process of Barter System

Exchang
e of
Negotiation Goods

Finding
a
Trading
Partner
Identifi
cation
of
Need
Limitations of barter system

Lack of Lack of
Indivisibility
Double Common
of
Coincidence Measure of
Commodities
of Wants Value

Difficulty in Difficulty in
Storing Transporting
Wealth Commodities
 Meaning of Money
Money is any item or medium of exchange that symbolizes perceived value. As a result, it is
accepted by people for the payment of goods and services, as well as for the repayment of
loans. Economies rely on money to facilitate transactions and to power financial growth.

“Money is what money does”

Money, in simple terms, is a medium of exchange. It is instrumental in the exchange of goods

and/or services. Further, money is the most liquid assets among all our assets. It also has
general acceptability as a means of payment along with its liquid nature.
Functions of Money
A medium of exchange

A standard of deferred payment

A store of wealth

A measure of value
Inflation
• Inflation is when the prices of goods and services keep
increasing over a certain period. It results in a decline in the
purchasing power of customers. According to many classical
writers, inflation is a situation when too much money chases
too few goods and services.

• It can also be defined as a decrease in the value of Money.

Inflation in economics is a rate or an indicator showing that
the value of money depreciates with time. In simple words,
expensive products and services today might become more
expensive tomorrow.
Types of Inflation

Demand
Cost-Pull Creeping
Pull
Inflation Inflation
Inflation

Walking Galloping Hyperinflati

Inflation Inflation on
 Measures to Control Inflation

Fiscal Measures
(Government Administrative
Monetary Measures
Actions) Measures (Direct
(RBI or Central
Government
Bank Actions) • Reducing Government
Expenditure
Interventions)
• Increasing Interest Rates • Price Controls
• Increasing Taxes
(Repo Rate, Reverse Repo • Anti-Hoarding and Anti-
• Reducing Fiscal Deficit
Rate) Black Marketing Laws
• Open Market Operations • Subsidy Rationalization
• Public Distribution System
(OMO) (PDS)
• Cash Reserve Ratio (CRR) • Encourage Import and
and Statutory Liquidity Reducing Export
Ratio (SLR)
• Controlling Credit Supply
Introduction to Banking
• Banking is a fundamental part of the financial system, acting as a bridge between
individuals, businesses, and governments to facilitate the movement of money, credit,
and investment.
• Banks are institutions that accept deposits from the public and provide loans, thereby
creating a link between savings and investment. They play a crucial role in fostering
economic growth and maintaining financial stability.
• Banking Sector in India refers to a network of financial institutions, such as banks and
credit unions, that handle financial transactions and provide financial services to
individuals, businesses, and governments.
History of banking in India : Pre-Independence Era
The First Bank in India: Bank of Hindustan (1770)
• Founding of Presidency Banks
– Bank of Bengal (1806)
– Bank of Bombay (1840).
– Bank of Madras (1843).

• three Presidency Banks were merged to form the Imperial Bank of India, which later
became the State Bank of India (SBI) in 1955.
 Private banks such as the Allahabad Bank (1865), Punjab National Bank (1894),
and Bank of India (1906) were established.
 The Swadeshi Movement (1905) led to the formation of indigenous banks to
promote self-reliance, including the Bank of Baroda (1908) and the Central Bank of
India (1911).
 The Reserve Bank of India (RBI) was established in 1935 to act as the central bank
Post-Independence Era
• Nationalization of Banks (1969 and 1980) : To curb the concentration of wealth, promote rural
development, and provide access to banking for all sections of society.

 In 1969, 14 major commercial banks with deposits exceeding ₹50 crores were nationalized.

 In 1980, six more banks were nationalized, bringing 91% of the banking sector under government control.

•Formation of Regional Rural Banks (RRBs):

 Introduced in 1975 to cater specifically to the credit needs of rural areas, especially farmers and small
businesses.

•Economic Liberalization (1991)

 Banking reforms were introduced to enhance competition, efficiency, and financial health. Entry of private
sector banks like HDFC Bank (1994) and ICICI Bank (1994). Expansion of foreign banks like Citibank
and HSBC
Modern Era
•Digital Banking: Internet Banking & Mobile Banking

•Payment Systems like UPI (Unified Payments Interface) : Launched in 2016 by NPCI (National Payments
Corporation of India), UPI revolutionized payments in India. It allows instant fund transfers between bank
accounts using mobile apps like Google Pay, PhonePe, and Paytm, contributing to a cashless economy.

•Rise of Specialized Banks: To cater to diverse needs, specialized banks were introduced such as Small
Finance Banks & Payments Banks:

•Financial Inclusion and Pradhan Mantri Jan Dhan Yojana (PMJDY): Launched in 2014, PMJDY aimed to
bring every household into the formal banking system by offering zero-balance savings accounts and other
financial services.

•e. Neo-Banking and Fintech: Neo-Banks are digital-only banks that operate without physical branches (e.g.,
Niyo, Jupiter). &Fintech companies provide innovative financial solutions, such as peer-to-peer lending, robo-
advisors, and blockchain-based services.
Banking Structure in India
 BASIS FOR COMPARISON CENTRAL BANK COMMERCIAL BANK

Meaning The bank which looks after the monetary The establishment, which provides
system of the country is known as Central banking services to the public is known as
Bank. Commercial Bank.
What is it? It is a banker to the banks and the It is the banker to the citizens of the
government of the country. nation.
Governing Statute Reserve Bank of India Act, 1934. Banking Regulation Act, 1949.

Ownership Public Public or Private

Profit motive It does not exist for making profit for its It exist for making profit for its owners.
owners
Monetary Authority It is the supreme monetary authority with No such authority.
wide powers.
Objective Public welfare and economic Earning Profits
development.
Money supply Ultimate source of money supply in the No such function is performed by it.
economy.
Right to print and issue currency notes Yes No

Deals with Banks and Governments General Public

How many banks are there? Only one Many
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