Money is a unit of account. They are extremely necessary for the development and functioning of the economy, as they allow you to compare the cost of various goods and services. The value of money is not constant, it changes, and accordingly, the value of goods and services also changes. A general increase in prices on the scale of a country's economy reflects a decrease in the value of money, and, conversely, a decrease in prices signals an increase in their value.
The concept of "value of money"
The value of money (or TMV - the temporary value of money) is an economic concept based on the assertion that the owner must constantly receive income from his capital. The WCD is also based on the premise that it is preferable for a person to receive a certain amount of money now than the same amount in the future.
The founder of the concept of "temporary value of money" is Leonardo Fibonacci, who invented this concept back in 1202. Despite the versatility of the concept, the version of the Middle Ages is still very different from the modern one. The reason for the difference is that, at that time, the likelihood of depreciation of notes due to external factors was not taken into account. They did not need to worry about inflation, because at the beginning of the 13th century, only coins made of precious metals were in use, and also copper coins for the implementation of smaller payments.
Since, according to WCD, today's income is more valuable than future income, two important consequences can be noted:
1. When conducting financial transactions, it is necessary to take into account the time factor;
2. From the point of view of the analysis of long-term financial transactions, it is incorrect to summarize monetary values that relate to different time periods.
Since the value of money over time is a fundamental concept of the theory of finance, it also depends on two basic factors - risk and inflation. Moreover, as practice shows, the most susceptible to devaluation are those paper money, the rate of which is not tied to the "troy ounce". Unlike credit banknotes, which can be exchanged for gold.
The time value of money today is an indicator used by economists of all modern states. This is especially evident in the formation of credit programs.
Calculating the value of money
The calculation of the value of money, like other economic indicators, is made according to special formulas.
First of all, for the accuracy of calculations, money from different periods is brought to the same period. Either it is a future period, or the discounted present.
To perform all the necessary calculations, two basic quantities are introduced:
- future value of FV;
is the discounted value of PV.
The discount rate underlying the calculation can be minimal or complex. The choice of the rate depends on the degree of profitability of investment projects.
