Why does money have a time value?

Question

Why does money have a time value?

Answer 1

Good data above.  Additionally, economies are generally inflationary.  $1 today will usually have better purchasing power than $1 a year from now.

Answer 2

Because you earn interest on money over time, that gives money value over the months and years. If someone promises to give you $105 in a year, you don't get the benefit of having that money for a year - so that $105 is only worth $100 to you right now. (assuming 5% interest) So the time value of money is usually based on the interest rate.

Answer 3

Money has a time value due to the following reasons:

1) Inflation - The value of money get reduced as time pass by.

2) Opportunity cost- It is defined as the cost for next best opportunity.

  

Hope the anser is clear  

Answer 4

People pay interest to borrow money, so a dollar today is worth more than a dollar someone would give you in the future.  If someone owed you a Note due a year from now, you would have to discount it to get the money immediately.

Answer 5

Eversince money was created, there has always been a simplified barter system in existence tackling the problem of impossibility of double co-incidence of wants. Now, it is always a barter of satisfaction of needs in exchange for purchasing power or a barter of skills, labour and assets in exchange for purchasing power. The characteristic of Money to act as a store of value is the solution to the problem faced during the prevalence of Barter system, before the advent of money as a medium of exchange. It started with commodities such as gold, silver and other metals being used as Money. This was the phase of COMMODITY MONEY. In this case money had both USAGE VALUE as well as EXCHANGE VALUE. PAPER MONEY that we see today, has only EXCHANGE VALUE and this paved way for specialization of commodities for production and expansion of Economy. I can gain Purchasing Power only by Liquidating anything, be it my skills or labour or Assets I own. I can satisfy my needs only by forgoing my Purchasing power in favour of another person who has the means to satisfy my needs. It is clear that, Purchasing power of the economy can be increased only by increasing the Natural Resources, more employment of labour and skills for production and more production of goods and services. Buying and selling of already existing assets only results in money changing hands. The concept of a NATION’S GDP representing its Purchasing power is based on this concept. To have purchasing power is to have something that is highly demanded by people at any point of time. Money, specially CASH, strongly and accurately represents PURCHASING POWER because of its liquidity arising from it being ‘AN ACCEPTED AND RECOGNIZED MEDIUM OF EXCHANGE’. I can sell my Car, and that way it has a Purchasing power to the extent it is in demand or has a buyer. But there could be a situation where no one wants a Car. In that case the EXCHANGE VALUE of my car as medium of exchange or money is ZERO owing to absence of any demand for the same. PAPER MONEY and COINS that we use today is actually FIAT MONEY, meaning, it has value as a medium of exchange due to Government Policy and Order. Rejecting the same as medium of exchange by any person would constitute a PUNISHABLE CRIME on his or her part. Thus, FIAT money will always retain its status as a Medium of Exchange because it is the will of the Government that it does so. But technically speaking, Inflation eats away the Purchasing Power of Money in the economy. If today I can buy 100 chocolate bars for Rs. 1000, tomorrow Inflation will result in Rs 1000 fetching may be only 800 bars . A productive and proper analysis of Inflation can be that it represents a situation where Resources are getting scarce or as in the case of Non-replenishable resources, moving towards extinction by way of DEPLETION eg. CRUDE OIL. In that case, the situation demands a change in the manner of consumption of these resources, identification of substitutes to these resources, reduction of Purchasing power. The logic behind FIAT money is also to control the purchasing power in the economy, whenever desired. In this the BANKS play an important role as they act upon the DIRECTIVES of the CENTRAL BANK eg. RBI  and accordingly reduce or increase the supply of Money in the economy through controlling the amount of loans being disbursed in the economy through them. Thus, INFLATION is a situation when PURCHASING POWER of THE NATION exceeds its GDP. Money in the hands of Public either as CASH or Money lying in the form of deposits with the Banks is either Transfer Income or Income earned. Thus Money is a proof of Contribution to the GDP of the NATION. It is only after I contribute my time, labour and skills to the economy of my country or any country, that I get money into my hands. The FRACTIONAL RESERVE SYSTEM practiced by banks all over the world results in CREDIT EXPANSION and this is exactly what is increased or decreased in times of DEFLATION and INFLATION respectively. Whenever, claims over assets find a market for themselves or become a commodity in itself , the Purchasing power of the Economy is increased but still that purchasing power is commodity money which is not as liquid as FIAT MONEY, specially CASH, as a medium of exchange and representative of purchasing power. Even Cheques in circulation, represent a claim over the money deposited in banks and are more liquid than MARKETABLE FINANCIAL CLAIMS lke EQUITY SHARES traded in the SECONDARY MARKETS through RECOGNIZED EXCAHNGES. NEW FIAT MONEY enters the economy through GOVERNMNENT EXPENDITURES, CREDIT EXPANSION through LOANS disbursed by COMMERCIAL BANKS, INFLOW OF CAPITAL FROM FOREIGN COUNTRIES through EXPORTS OF GOODS AND SERVICES and the situation is reversed when we pay TAXES to the GOVERNMENT, REPAY LOANS TO BANKS, IMPORT GOODS AND SERVICES FROM FOREIGN COUNTRIES resulting in FIAT MONEY taking an EXIT from the Economy.