Question

In: Economics

Money is often used to purchase item in society, but bartering was common in the past....

Money is often used to purchase item in society, but bartering was common in the past. Bartering is the trading of one good or service for another good or service.

Explain your experiences with bartering. List at least 1 advantage and 1 disadvantage to bartering.

Most developed countries in the world use flat money. This means that their money is not backed by gold or silver. The value is related to only the faith in the country that backs it. The US has used flat money since the 1970s.

Why do you think most developed countries use flat money? Would it be practical to switch back to a commodity (like gold or silver) backed money system? Why or why not?

Use at least two of the following terms in your answer: Asset

Flat Money

Store of value

Unit of account

Medium of exchange

Expert Solution

Experience with Barter Trade: Although it is not a trade specific example. This is what I experienced few days back when I was having 4 chocolate with me and my brother has 3 cups of ice cream. So, he wanted to have one chocolate and I wanted one cup of ice cream. So, I simply exchanged one chocolate in exchange of one ice cream cup.

Advantage of Barter Trade:

Personal and natural resources are perfectly utilized to meet the requirements of the society without involving any wastage.
It is a simple system free from the complex problems of the modern monetary system.

Disadvantages of Barter Trade:

Absence of common measure value: Money plays the role of a measure of value of all goods in a monetary economy thus being helpful in measuring their values against each other. This role might be absent in a barter economy.
Invisibility of certain good: A barter transaction cannot occur if an individual wants to buy a certain amount of goods but only has single invisible unit of another good which is worth more than what the individual wants to obtain.

Fiat money is the paper money which is inconvertible and legal tender by the government.

Most of the nations uses Fiat money because of its following advantages:

Store of value: Unlike gold, which is very difficult to store. Fiat money is easy to store and can be used anytime.
Medium of exchange: Since it is a legal tender by the government, everyone readily accepts fiat money as a medium of exchange
Unit of account: The value of goods and services can be easily stated in terms of money which is called the price of goods and services. In barter system, measuring the unit of each good was difficult, For example, how much wheat should be exchanged with 1 kg of rice.
Standard of deferred payments: With money, we can make the payments in the future also. We can defer the payments.

No, it would not be practical to switch back to a commodity (like gold or silver) backed money system because the problem with gold standard was that the size and health of the economy was dependent on the supply of gold in the country. A country without any gold is at competitive disadvantage.

Also, it is very difficult to carry the gold and store it because it is a very precious metal.

Rahul Sunny answered 2 years ago

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