Question

2. Based on your understanding explain the following with real world examples

a) Money

b) Inefficiency in a barter economy

Answer 1

Money

Money is a medium of exchange and also a store of value. Money can be in any denomination, example $1, $2, $5, $10, etc. Money was evolved because barter system had a lot of inefficiency. If you want to purchase a car you need to pay the value of the car in terms of money. Money, in today's world, is used to purchase any kind of goods and services. The central bank of a nation make this money available to its citizens.

Example of money- In the United states US dollar is used as an exchange of value. Likewise, every country has a unit of exchange relative to which it values all its goods and services. A service can be priced at $100, a food item can be priced at $40, etc.

Inefficiency in a barter economy

A barter exchanging particular goods or services for another goods or services. For example, if you want to purchase fish and you have rice, you will exchange the rice that you have for fish. There is no money involved in the transaction. Barter system did not succeed because of the many inefficiencies that it had. Barter required coincidence of wants which was not possible in reality. Barter also required an equal value of good in exchange which was not always possible. Example- For 1 kg of rice I cannot sell a table as a table is more valuable, nor can I cut the table into pieces. These inefficiencies led to the introduction of money in the economy.

Example of barter inefficiency- If I am sick and go to the doctor for a checkup, I will have to exchange something that I produce in exchange of the service that the doctor provides. It can be possible that the doctor does not demand the same product as I am able to give and the barter does not work.

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