(a) Distinguish between a cheque and a bank note [8 marks] (b) What are the main problems of trade by barter? [12 marks]

Answer Details

(a) Cheque compared with a bank note.

(b) Main problems of trade by barter. Barter is the direct exchange of goods for goods without money. Its problems are:

1. Double coincidence of wants: each trader must find someone who has what he wants and also wants what he has, which is difficult and time-wasting.
2. Lack of a common measure of value: there is no single unit for pricing, so it is hard to state how much of one good exchanges for another.
3. Indivisibility of some goods: items such as a cow or a house cannot be split to buy small-value goods without destroying their value.
4. Difficulty in storing value (wealth): many goods (foodstuffs, livestock) are perishable, so wealth cannot easily be saved for the future.
5. Problem of deferred (future) payments: contracts, loans and credit are hard to arrange because there is no stable standard for repayment.
6. Lack of portability: moving bulky goods over distances to exchange them is costly and inconvenient.

Examination reminder: present the barter problems as the mirror-image of the functions of money, since money was invented to solve exactly these difficulties.