Gresham law
-. It was introduced by sir Thomas gresham.
- he was an economist, a well known business man and economic advisor of queen Elizabeth 1.
- according to sir Thomas gresham" bad money drives out good money out of circulation".
Good money and bad money.
Good money:- good money means that money which is of full value and any deprivation in it does not affect its economic value.good money is usually bumetallib.in case of paper money good money is that money which is not torn or worn.
Bad money:- bad money the money which loses its internal value due to depriciation or any cause. According to bimetallism the money whose market value is less than its internal value, is called bad money.
Applicability of Gresham law
Or
Why bad money drives out good money out of circulation???
- good money drives out bad money out of circulation due to following reasons:-
1. Human nature:- it is common human nature that he discard the bad thing and accept the good things.due to this very reason when both good and bad money are availabea in economy during circulation he keeps good money with himself and allows the bad money to flow in the circulation.
2. Hoarding of money:- normally people have saving tendency. Those who are interested in keeping their saving in terms of curriencies in liquid form they always keep the good money.
3. Melting of coins:- in melting of coin sometimes it happened that small portion of certain metal like gold and silver is added in the coin to increase its market value.so, for the purpose of melting new and fresh coin is better. So, people used to keep good mobmo with himself.
4.foreign paynent:-for foreign payment new coins were saved keeping in view their weighted and purity.
EXPLANATION OF GRESHAM LAW
IT CAN BE EXPLAINED UNDER 4 DIFFERENT CASE:-
case1 :- in case of monometallic sysren.
Case 2:-in case of bimetallism method.
Case 3:-in case of paper currency.
Case 4:-when paper currency and both coins are in circulation.
Case 1:- under monometallic system:--nder monometallic system only one standard currency is used that may be gold or silver. For small payments cheap and light curriencies are used which may be differentiated in shape and size. When standard and full bodies coins are used then among them some of the coins remain new while some become old. Here Gresham law is applied . Old and depriciated coins are circulated in the market while standard and full bodies new coins are either horded by people or are used in foreign transaction.
CASE 2. Bimetallism method.
Under bimetallism method standard coins of both gold and silver are used and they are legal tender money.there is a certain exchange rate which is fixed by the government.now among both the metals if the value of any metal either gold or silver become more, then the coins of very metal becomes good money as its start getting horded by the people instead of putting it back in circulation.
CASE3:- UNDER PAPER CURRENCY
paper money are in the form of paper.they can't be melted and even it is not wise to store it for future.but it's the general tendency of people to save new note.
CASE 4:-WHEN PAPER MONEY AND COINS BOTH ARE IN CIRCULATION:-
When in a country both paper money and coins are in circulation, then metal coins are considerd as good money. Since, they can be melted in adverse situation.
LIMITATIONS OF GRESHAM LAW:-
1. when the demand for money is more than its supply.
2. When banking system is developed in a country.
3.when the public boycotts bad money.
4.when token coins are in circulation:- the value of the token coins is far less than their internal valurm. So, due to its inferior nature Gresham law is not applicable.
-. It was introduced by sir Thomas gresham.
- he was an economist, a well known business man and economic advisor of queen Elizabeth 1.
- according to sir Thomas gresham" bad money drives out good money out of circulation".
Good money and bad money.
Good money:- good money means that money which is of full value and any deprivation in it does not affect its economic value.good money is usually bumetallib.in case of paper money good money is that money which is not torn or worn.
Bad money:- bad money the money which loses its internal value due to depriciation or any cause. According to bimetallism the money whose market value is less than its internal value, is called bad money.
Applicability of Gresham law
Or
Why bad money drives out good money out of circulation???
- good money drives out bad money out of circulation due to following reasons:-
1. Human nature:- it is common human nature that he discard the bad thing and accept the good things.due to this very reason when both good and bad money are availabea in economy during circulation he keeps good money with himself and allows the bad money to flow in the circulation.
2. Hoarding of money:- normally people have saving tendency. Those who are interested in keeping their saving in terms of curriencies in liquid form they always keep the good money.
3. Melting of coins:- in melting of coin sometimes it happened that small portion of certain metal like gold and silver is added in the coin to increase its market value.so, for the purpose of melting new and fresh coin is better. So, people used to keep good mobmo with himself.
4.foreign paynent:-for foreign payment new coins were saved keeping in view their weighted and purity.
EXPLANATION OF GRESHAM LAW
IT CAN BE EXPLAINED UNDER 4 DIFFERENT CASE:-
case1 :- in case of monometallic sysren.
Case 2:-in case of bimetallism method.
Case 3:-in case of paper currency.
Case 4:-when paper currency and both coins are in circulation.
Case 1:- under monometallic system:--nder monometallic system only one standard currency is used that may be gold or silver. For small payments cheap and light curriencies are used which may be differentiated in shape and size. When standard and full bodies coins are used then among them some of the coins remain new while some become old. Here Gresham law is applied . Old and depriciated coins are circulated in the market while standard and full bodies new coins are either horded by people or are used in foreign transaction.
CASE 2. Bimetallism method.
Under bimetallism method standard coins of both gold and silver are used and they are legal tender money.there is a certain exchange rate which is fixed by the government.now among both the metals if the value of any metal either gold or silver become more, then the coins of very metal becomes good money as its start getting horded by the people instead of putting it back in circulation.
CASE3:- UNDER PAPER CURRENCY
paper money are in the form of paper.they can't be melted and even it is not wise to store it for future.but it's the general tendency of people to save new note.
CASE 4:-WHEN PAPER MONEY AND COINS BOTH ARE IN CIRCULATION:-
When in a country both paper money and coins are in circulation, then metal coins are considerd as good money. Since, they can be melted in adverse situation.
LIMITATIONS OF GRESHAM LAW:-
1. when the demand for money is more than its supply.
2. When banking system is developed in a country.
3.when the public boycotts bad money.
4.when token coins are in circulation:- the value of the token coins is far less than their internal valurm. So, due to its inferior nature Gresham law is not applicable.
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