Question

discuss the efficiency of money over the barter system of exchange.

Answer 1

Barter system of exchange is a system of exchanges in which goods are exchanged for goods. For example, if a wheat farmer wanted to get his footwear fixed, he would have had to find a cobbler who also wanted wheat. This is known as the double coincidence of wants. Money is defined as the medium of exchange which separates the act of sale and purchase which is easy to store and transfer from one place to another.

Money is more efficient that the barter system as:

1. It eliminates the need for double coincidence of wants. As a result, transactions are speedy and efficient.

2. Store of value: it is very easy to store money with banking system in practice but it was not easy to store goods since it increased the maintainence cost. Further, some goods were perishable and could not be story for future. Holding money is a much easier way of storing value.

3. Transfer of value: we can easily transfer money from one place to another which was not the case when barter system was in practice. For example, land could not be transferred.

4. Standard for deferred payment : we can purchase goods now and pay for it later in future but that was not a case in barter system of exchange because the exchange took place at the same time.  This means that if money is usable today to make purchases, it must also be acceptable to make purchases today that the purchaser will pay in the future. Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to buy goods and services today and pay in the future.

5. Divisibility- Under barter system, divisibility was a big problem. For example, a horse could not be divided and exchanged for different needs. But introduction of money aids divisibility.

6. Unit of account: money serves as a unit of account, which means that it is the ruler by which we measure values. Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.