The relationship between money and economic activity is going both ways. On the one hand, cash forms are a reflection of a certain economic activity through production. Assets create and finance their own economic activity. Money reflects economic activity. This is significant for the development of monetary theory.
On the other hand, money serves as a regulator of economic activity. Also, it represents the connection between individual producers and the social character of production. When an entity has an intention is producing it must have the financial means to do so. If the amount is not enough he needs to borrow funds. So choosing how much funding will be choosing how much to produce. It determines the total volume of economic activity.
Different Theories of Money
Quantitative theory of American economist Irving Fisher raised the issue of the relationship between money and economic activity. He claimed that the total monetary value of transactions in an economy is totally independent of the level of economic activity.
Any given amount of money determines independently.
Keynes, as a response to dramatic changes in the monetary system after World War and the Great Depression, offered such a monetary system in which the central bank will be a decisive factor. The main tool of the new monetary policy is the policy interest rate. This establishes a close connection between the created cash reserves of the central bank and the level of economic activity that implemented through interest rates on bonds, prices of capital goods, fixed investment policy companies. Focus on changes in the interest rate representing a response in the economic system to changes in the quantity of money.
In international economic, relations are frequent situations that the wiring involves trading countries whose currency is not convertible, or they are in the balance of payment difficulties. In this situation, we resort to the so-called. barter or compensation deals.
The basic principle in barter operations is to supply a foreign country and expect compensation in goods. The calculation is not made in cash but one good exchanged for other goods. Barter trade can arrange at the enterprise level and at the state level.
Companies often contract the barter, when they take place in countries where there is an unstable financial situation and where there is a sufficient degree of certainty. To such avoid risks, and work is still done resorting to tackle the supply of goods for goods, ie. shall be agreed compensation business.
When the barter operations agreed between the countries is then inter-state. Then an inter-state agreement negotiated lists and amounts of goods that will be subject to delivery. Each country through the authorized banks to make payments to their companies when they conduct export country with which it has concluded a clearing agreement. In principle, we should balance the international clearing mutual supply.