Question

What is "Time Value of Money" relating to economics?

Answer 1

Time value of money is a concept in economics which states that a fixed sum of money's worth is more in the present time as compared to the future time. This means that if a rational person is given two options in which under first option he will get $1,000 immediately and in the second option he will be given $1,000 after 1 year, though the received amount is same in both options, a rational person would always choose the first option because he will get more utility and satisfaction as the person can earn interest rate by depositing the same amount in a bank for a whole year which makes $1,000 present worth more than $1,000 received in future. So, the value of $1,000 in the present scenario is more than the $1,000 he will get after 1 year because of the opportunity cost involved with the first option. Hence, from this, we can conclude that money has time value which explains our concept of Time value of money.