Question

What is the difference between near-money and money?

Short answer

Money is universally accepted as payment for goods and services whereas near-money refers to assets easily convertible into cash but which may not be universally accepted for all transactions. The main difference lies in liquidity and acceptability.

Step-by-step solution

Definition of Money

Money refers to anything that is universally accepted as payment for goods and services or repayment of debts. This mainly includes coins and notes.

Definition of Near-money

Near-money, on the other hand, refers to assets that are easily convertible into cash with little to no loss of principal. This includes things like savings accounts, marketable securities, and treasury bills.

Contrasting Money and Near-money

The main difference between money and near-money is that money is a medium of exchange accepted everywhere, while near-money instruments may require time or involve a cost to be converted into money. However, both are used as stores of value.

Key concepts

Medium of Exchange

When we talk about money being a medium of exchange, we are referring to its ability to facilitate transactions. This means that money is widely accepted as a means to purchase goods and services. Imagine going to a store and buying a book. You can hand over money, and you receive the book in return. Everyone knows the value of money, allowing for seamless exchanges without the need for bartering.
However, near-money doesn't directly fulfill this role. It includes items like savings accounts or treasury bills, which cannot be directly used to buy things in the market. While you can't take a treasury bill to the store to buy groceries, it can still play a big part in your financial planning by being converted into money when necessary.

Store of Value

Money not only makes transactions possible, but it also acts as a store of value. This means it retains value over time, allowing people to save and retrieve purchasing power. If you put away a $100 bill today, you expect it to still be worth $100 next year, barring inflation effects.
Near-money, too, serves as a store of value. For instance, savings accounts earn interest over time, making them a good option for storing wealth while potentially growing it. The principal amount remains safe and accessible, ensuring it holds its value until needed.

• Both money and near-money can preserve purchasing power.
• Where they differ, however, is in their liquidity. Money is instantly available for purchases unlike most forms of near-money.

Convertible Assets

Convertible assets refer to forms of near-money that can quickly be turned into cash, although with some potential limitations. The conversion aspect is key here – how easily and quickly can you transform these assets into spendable money?
Savings accounts are good examples of convertible assets because you can usually withdraw cash quickly without any financial penalty. However, some near-money assets, like time deposits, may have restrictions or penalties if converted prematurely.
Understanding convertible assets helps in financial planning because it offers insights into liquidity – how ready you are with cash when the unexpected happens. Each form of near-money provides different levels of liquidity, impacting how they serve your needs for spending or saving.