Question

1. Explain the difference between direct exchange and indirect exchange
2. Cattle have been used as commodity money for a long time historically. What makes it less than ideal as a measure of value?

Answer 1

Direct exchange occurs when we directly exchange two commodities and both the commodities are actually what the other person wanted. For example, if you exchange your shoes for money from other person, this is direct exchange. The other person was in need of shoes and you wanted money.

Indirect exchange can be explained using the following example: Let us suppose that a farmer wants shoes but he could not find someone who wants to give away shoes in exchange of his wheat. So he exchanges his wheat for a cow and then exchange the cow for shoes from a person who had shoes but wanted a cow (and not wheat).

Cattle has been used as commodity money for a long time. However, the problem of double coincidence of wants arises with it. If I have cattle and I want to exchange it for clothes, I may not be able to find someone who wants to give away clothes for cattle. They might be looking for wheat or rice in exchange of clothes.

Similarly, if someone wants to trade in far off places, it would not be feasible to accept cattle as money and the bring back all cattle back home.

Another issue is that cattle is a living thing. If it dies, the money is lost.