Money plays a vital role in the economy. And we are all running around trying to secure sources of money and earn a living. Since ages ago, the different forms of money have been used as a medium of exchange, a means of holding wealth, a standard of deferred payment and a unit of account. While the definitions of money vary by country, each country has a measure for broad money and narrow money. In this article, we will discuss the difference between broad money and base money.
What is Broad Money?
Broad money is the most inclusive measure of a nation’s money supply. It includes narrow money and other assets that can be converted to cash easily. Being the most flexible method used in measuring money supply in an economy, central banks are keen on keeping tabs on broad money to help them forecast inflation.
Cash is always in circulation. As such, it is not easy for economists to estimate the amount of money in circulation using cash. And here comes broad money. Since it is the broadest measure of money, it encompasses narrow money (checkable deposits & cash) and less liquid assets such as foreign currencies, certificates of deposit, treasury bills and other items that can be converted to cash easily.
The formula for calculating broad money varies by nation. Here are some of the ways that nations calculate broad money:
- Canada- Broad money (M2) in Canada includes all narrow money, market deposit accounts, savings deposits, time deposit accounts and retail money market mutual funds balances.
- Europe- The broadest money (M3) includes all M2 items, money market base shares, repurchase agreements, debt securities and money market paper.
- The United Kingdom- The broadest money (M3H) includes all narrow money and foreign currency deposits in building societies and banks.
- Japan- Broad money (M3) includes all narrow money, deposits in post offices, financial institutions and savings.
What are the benefits of broad money?
The main benefit of broad money is its use by economists to spot potential inflation trends.
What is Base Money?
Also referred to as monetary base, base money is the total amount of currency in circulation. Base money, which is abbreviated as M0, includes the amount of money in circulation and the bank reserves. Base money is barely used since it also includes other forms of non-currency money that are available in the modern economy.
Most often, economists consider other monetary aggregates such as M1 and M2. Despite this, base money is a vital component of a country’s money supply as it provides a measure of the amount of cash that is circulating in an economy. It is created and circulated by monetary authorities or central banks. If the central bank wants to encourage inflation, it can increase the amount of base money in circulation. And if they want to encourage deflation, they can reduce the base currency in circulation.
Differences between Broad money and Base money
Definition
Broad money is the most inclusive measure of a nation’s money supply that includes narrow money and other assets that can be converted to cash easily. On the other hand, base money is the total amount of currency in circulation and includes the amount of money in circulation and the bank reserves.
Use
Broad money is used by economists to spot potential inflation trends. On the other hand, base money is used to measure the amount of cash that is circulating in an economy.
Abbreviation
Broad money is abbreviated as M4 (may differ depending on a country). On the other hand, base money is abbreviated as M0.
Broad money vs. Base money: Comparison Table
Summary of Broad money vs. Base money
Broad money is the most inclusive measure of a nation’s money supply. It includes narrow money and other assets that can be converted to cash easily such as foreign currencies, certificates of deposit, treasury bills. On the other hand, base money is the total amount of currency in circulation and includes the amount of money in circulation and the bank reserves.
FAQs
Does broad money include base money?
Yes.
What is called broad money?
It is a measure of the amount of money supply that includes narrow money and other less liquid money.
What are the 4 types of money?
The four types of money include commercial money, commodity money, fiduciary money and fiat money.
Is M4 broad money?
Yes, M4 is broad money.
Tabitha graduated from Jomo Kenyatta University of Agriculture and Technology with a Bachelor’s Degree in Commerce, whereby she specialized in Finance. She has had the pleasure of working with various organizations and garnered expertise in business management, business administration, accounting, finance operations, and digital marketing.
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Cite
APA 7
Njogu, T. (2022, April 15). Difference Between Broad Money and Base Money. Difference Between Similar Terms and Objects. http://www.differencebetween.net/business/difference-between-broad-money-and-base-money/.
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Njogu, Tabitha. "Difference Between Broad Money and Base Money." Difference Between Similar Terms and Objects, 15 April, 2022, http://www.differencebetween.net/business/difference-between-broad-money-and-base-money/.
FAQs
A monetary base is the total amount of a currency in general circulation or in the commercial bank deposits held in the central bank's reserves. Broad money is the most flexible method for measuring an economy's money supply, accounting for cash and other assets easily converted into currency.
What is the difference between narrow money and broad money? ›
The key difference between broad money and narrow money is that while narrow money is highly liquid and can be easily used for transactions, broad money includes all types of money in an economy and reflects the total value of money available to individuals and businesses.
What is the difference between the two types of money? ›
Different 4 types of money
Fiat money – the notes and coins backed by a government. Commodity money – a good that has an agreed value. Fiduciary money – money that takes its value from a trust or promise of payment. Commercial bank money – credit and loans used in the banking system.
What is the difference between M0 and MB? ›
M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves. MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed).
What is the best example of broad money? ›
Broad money generally also accounts for "near money," such as deposit certificates (DCs), foreign currencies, money market accounts, marketable securities, Treasury bills (T-Bills), and anything else that can easily be converted into cash, excluding company shares.
What is broad money vs base money? ›
A monetary base is the total amount of a currency in general circulation or in the commercial bank deposits held in the central bank's reserves. Broad money is the most flexible method for measuring an economy's money supply, accounting for cash and other assets easily converted into currency.
What is base money in economics? ›
The monetary base of an economy includes all of the physical paper and coin currency in circulation, plus bank reserves held by the central bank. The monetary base is sometimes referred to as high-powered money as it can be expanded through the money multiplier effect of the fractional reserve banking system.
What are the two main forms of money? ›
Commodity money has intrinsic value because it has other uses besides being a medium of exchange. Fiat money serves only as a medium of exchange, because its use as such is authorized by the government; it has no intrinsic value.
What are the three main types of money? ›
Economists differentiate among three different types of money: commodity money, fiat money, and bank money. Commodity money is a good whose value serves as the value of money. Gold coins are an example of commodity money. In most countries, commodity money has been replaced with fiat money.
What are the two definitions of money? ›
Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.
The monetary base (or M0) is the total amount of a currency that is either in general circulation in the hands of the public or the form of commercial bank deposits held in the central bank's reserves.
What is M1, M2, M3, M4 money? ›
Additional Information
| Mo(Reserve Money) | Currency in circulation + Bankers' deposits with the RBI + 'Other' deposits with the RBI |
|---|
| M2 | M1 + Savings deposits with Post office savings banks |
| M3 (Broad Money) | M1+ Time deposits with the banking system |
| M4 | M3+ All deposits with the post office savings banks. |
1 more rowApr 8, 2024
M0 refers to the most liquid form of money: cash. That includes central bank notes and coins. MB refers to the base money supply from which banks can extend the money supply. In addition to M0, that also includes central bank deposits, which can't be used to pay anyone other than banks.
What is another name for broad money? ›
M3 measurement of money supply is a broader concept of money supply compared to M1. Besides all the components of M1, it includes net time deposits (or fixed deposits or term deposits) of the people with the commercial banks. Therefore, M3 is also called broad money.
What does broad money stand for? ›
1. to be a symbol for or sign of; represent; mean. 2. US, Informal. to put up with; endure; tolerate.
How do you calculate broad money? ›
M3 is broad money. M3 = M1 + Time deposits with the banking system. M2 = M1 + Savings deposits of post office savings banks. M1 = Currency with public + Demand deposits with the Banking system (savings account, current account).
Are M1 and M2 called broad money? ›
It means they cannot be withdrawn or used by the people immediately like M1 and M2, which represent narrow money. Therefore, M3 and M4 are termed as broad money.
What is the difference between broad money and reserve money? ›
Description: M3 is a measure of broad money and includes currency with the public and deposits. The Reserve Money factor shows the reserve money and includes required reserve and the excess reserves of the banking system.
What is narrow money M1, M2, M3, M4? ›
Narrow money is also known as M1 and M2. Broad money means M3 and M4. The liquidity of these grades is decreasing. M1 is the most liquid and makes transactions the easiest, while M4 is the least liquid. The most commonly used indicator of the money supply is M3.
