(a) Outline any four problems of… | Economics

Question 1 Report

(a) Outline any four problems of barter economy.

(b) How has the introduction of money solved the problems outlined in 12(a) above?

Answer

Answer Details

(a) Four problems of a barter economy

Double coincidence of wants: a person must find someone who both has what he wants and wants what he has, which is difficult and time-wasting.
Lack of a common measure of value: there is no single unit in which to express and compare the worth of different goods.
Indivisibility of certain goods: some goods (for example a cow) cannot be split to pay for a small item without losing value.
Problem of storing value and deferred payment: perishable goods cannot store wealth, and it is hard to make or settle debts fairly over time.

(b) How money solved these problems

As a medium of exchange, money removes the need for a double coincidence of wants: goods are sold for money, and money buys any other good.
As a measure (unit) of value, money provides a common denominator so the value of all goods can be expressed and compared in prices.
Because money is divisible into small units, goods of any size or value can be bought and change given easily.
As a store of value and a standard of deferred payment, money lets people keep purchasing power for the future and make and settle debts conveniently.

Thus each function of money directly answers a specific weakness of barter.

(a) Outline any four problems of barter economy. (b) How has the introduction of money solved the problems outlined in 12(a) above?