Definition

                The value of money is defined as the quantity of goods and services that a given sum of money can buy at a particular time I.e. It is the purchasing power of money. The value of money is affected by the prices of goods and services. That is the rate at which a particular good or service will be exchanged for other goods. This means that when prices of goods and services are generally high, the value of money will be low and vice versa.

There are two main factors that influence the value of money.

1. The general price level: The general price level and value of money are inversely related. That is, when the price level increases, the value of money decreases. In other words, the quantity of goods and services that a given sum of money can buy reduces when the prices are high.
2.  Quantity of money in circulation: When the amount of money in circulation in the economy increases, the value of money falls and when the amount of money in circulation decreases, the value of money increases. This depends on the assumption that the quantity of goods and services produced in the economy remains constant.

The Price

             It is the amount of money spent to buy one unit of a commodity. It is also known as average revenue. It could also be defined as the exchange value of a good, service, asset or factor input.

When prices of goods and services are compared, it means that we are comparing the rates or values at which the different goods and services can be exchanged. Therefore, when prices of goods and services are high, the value of money will be low and vice versa. It is important to note that it is difficult to determine the value of money accurately, and the only good indicator is the general price level measured in terms of the retail price index.

                                      An Index

         An index is a sign or measure of something. It is a statistical measure of changes in something such as portfolio of stock. It is usually expressed as a percentage and used to compare changes in Production, prices of consumer goods, exports, imports amongst others from a given year to another. For example, the most commonly used index, is that which measures prices of consumer goods and it is referred to as the Retail price Index (RPI) or Cost of Living index.

                         Retail Price index (RPI) of Cost of living index

                  The retail price index is an index used to measure changes in the general price level of consumer goods and services. It could also be defined as a weighted average of the prices of selected consumer goods and services measured over time.

Construction of a Retail Price Index

                 To construct a retail price index, the following steps are taken:

1. Choice of a base year: A base year is the starting point of measurement. It must be a stable year I. e. one with no inflation or deflation. Retail prices index for the base year is always 100.
2.  A representative population: This is a selected sample of the population with similar spending habits I. e. Average family is chosen
3. Choice of a range of goods and services (basket of goods): These should be goods commonly consumed by a majority of the sampled population regularly on the average. A weight should be given to each goods indicating it relative importance
4. Compare the base year price with those of the following year of the same set of goods and note the change that might have taken place. It is calculated as