Question

Makandingi, a prosperous agrarian economy, had been in existence since 1360. The economy could boast of brave warriors and industrious citizens. The people of Makadingi were mainly farmers. The economy was well noted for livestock rearing and production of vegetables, plantain and oil palm. The Makandingian economy was full of praise for its trading activities. The individuals and groups of people exchanged commodities among themselves and with other neighbouring economies without financial transactions. The exchange of commodities operated on the principle of ‘coincidence of wants’, mutual trust and cooperation between the traders.
It is worthy to note that the trading activities had its own challenges. Mr. Mazunga Mbobe, a wealthy trader, lamented bitterly about the absence of ‘double coincidence of wants’ in some cases which made transactions inconvenient. He further decried the challenges of lack of a standard unit of measurement or value, lack of store of value and lack of standard system for future payments which created confusion among traders.
Other notable traders also complained about lack of divisibility within the system of commodity exchange value which adversely affected their business. One of them in illustrating this point said, “a pastoralist who wished to trade his cow for goods equivalent to its value had to kill the cow in order to do so due to lack of divisibility”. He further added that, “in certain instances, the commodities meant for exchange were heavy or bulky and highly perishable making trading complicated and difficult”. In spite of the challenges associated with trading in the Makandingian economy, the traders never gave up. They were hopeful that in future conditions would improve to enable them enjoy a thriving commercial activity.
With reference to the above case and as a student who has studied Economics for Business,
(a) What advice will you give to the king and traders in order to address the challenges associated with trading activities in Makandingi?   2 marks      

(b) In what practical ways will the implementation of your advice help solve the challenges facing commercial activities in Makandingi and its neighbouring economies?                      18 marks               

Answer 1

(a) The king should introduce the monetary system in the kingdom. "Money" in the form of a fiat currency should be implemented. This should be backed by the kingdom's gold reserves.

(b) This will solve many of the problems which the people are facing, such as:

• absence of ‘double coincidence of wants’: in a monetary system, this is not a problem. It is not necessary that a cow shall be traded for wheat. Money itself is valuable.
• lack of a standard unit of measurement or value: money provides a standard unit, which is globally the same.
• lack of store of value: money can be stored for long periods of time, in physical and electronic form.
• lack of standard system for future payments: money can be used to pay for deferred payments, over a period of time
• lack of divisibility: money can be divided into smaller denominations
• commodities meant for exchange were heavy or bulky and highly perishable: money is light, portable and non perishable

Thus by adopting a monetary system, the king will solve the traders' major problems.