Question

5. What is a “barter” transaction, exactly? Please give an example of a barter transaction that was not discussed previously. 6. a) Exactly what is required for a barter transaction to occur? b) Why do many economists argue that a barter transaction is not as “efficient” as a money-based transaction? 7. Please describe the concept of “counterfeit” and give an example of a situation involving this concept. 8. What is “hyperinflation”, exactly? Why must every country’s government worry about it? Give an example of hyperinflation: why is it so harmful to a nation’s economy and its people?

Answer 1

Answer - 5)Barter transaction-In the system, goods were used as medium of exchange, due to the unavailability of money. It is the system in which homo-sapiens exchange goods and services for other goods and services in return.

Example of barter transaction is trade of shoes and wheat.

Answer 6a) To have the barter transaction two person with same good desired must be there to control coincidence of wants. For example, if person want wheat for cloth then other person must want cloth for wheat

Part b)

Many of the problems are concerned with the barter system. Double coincidence of wants is the major problem. It reveals that trade will take place between two persons only when they require each other products. Barter system based exchange of goods and services is advantageous only in simple and less populated economy because people have knowledge of needs and wants of each other. Nevertheless, it is not opportune, to know the requirements of each other in a complex economy where people have unlimited wants. In such a case, barter does not stand and demise eventually. Secondly, in the barter system, there is no common measure of value; therefore, it is hard to find account out fixed ratio for exchange of goods and services. For example, an individual is willing and have ability to buy shoes in exchange of cotton. In such a case, the condition of double coincidence of wants is satisfied. However, another problem that arises in this exchange is the exchange value of cotton and shoes. It is not facile to decide what quantity of cotton can be exchanged for the shoes. In case, exchange rate is decided on the basis of intensity of demand. Thirdly, some goods are not divisible and in the case, barter system is not fruitful. For instance, value of one camel is equal to two horses. Means one camel can be exchanged for the two horses. If, customer wants one horse for the half of the camel, then the utility from camel will disappear and on the other side, if customer takes one horse for the camel, then he incurs losses. Therefore, it is difficult to have trade in indivisible goods. Another worriment related to barter system is the deferred payments. Deferred payments are those payments that are made in future. For instance, interests, rents, loans, and insurance premium. In the barter system, commodities are used as a medium of exchange; therefore, it is very difficult to make deferred payments.

Therefore, in direct way, barter system is not used as a medium of exchange.

Answer 8 Hyperinflation-It is the highest level of inflation and not controllable. It is the inflation which incur due to inelastic demand. Every nation is worry about hyperinflation because reduces the value of money and depreciates the currency in international market. It reduces foreign direct investment.