Question

 

1. Explain why a market structure in which money is used as a medium of exchange is more conducive to the expansion of trade and exchange than a barter system.
2. What is money? Explain the three functions that money performs.
3. What is the relationship between money and inflation? Explain

Answer 1

Note: As per answering guidelines, only the first question can be answered.

Solution:

Why money being used as a better medium of exchange better than the barter system?

Money as medium of exchange is a far advanced trade practice than barter system. The differences between the two are that of the degrees of convenience, functionality, efficiencies, effectiveness and adaptability. In other words, the purpose of medium of exchange is far better served by money than barter which leads to superior expansion of trade with the use of money Let's look at key points below:

• Money enables with assigning values to various things. With barter system, it becomes very tough to assign value to various items proposed to be exchanged with one another, i.e. how many kilograms of rice in exchange of cow? Money acts as a unit of account and thus, value of each item can be defined in terms of units of money which helps in substantially increasing the volumes of trades
• In case of barter, a person can only sell something when there is something he needs to purchase in return as there is no concept of store of value. If he sells rice and buy wheat in return even though he doesn't need it for another month, the wheat could become stale and useless by the time its required. However, the money acts as a store of value such that a person can sell something against money and store value of that trade in it even if he doesn't require to purchase anything in return immediately. This overall shifts trade from need based towards building and creation of wealth and a rich society by enabling substantial expansion of trade
• Money as a medium of exchange brings standardisation, speed and efficiency into trade practices whereas barter system is slow, hard to execute and inefficient by its very nature. Needless to say, this results in expansion of trade
• Money is easily portable and be carried and transferred easily whereas a barter system results extremely inconvenient transfers of goods which are not easily portable
• Money as a medium of exchange helps expansion of credit practices which results in overall expansion of trade