State any five reasons why the use of money has replaced the barter system in modern economic transaction.

Answer Details

The barter system requires the double coincidence of wants, meaning that two people must each possess exactly what the other needs and want to exchange at the same time. Money removes this and other rigidities of barter, which is why it has largely replaced barter in modern transactions.

Five reasons why money replaced barter:

1. It provides a medium of exchange. Money is generally acceptable, so a person can sell goods for money and use that money to buy anything else, removing the need for a double coincidence of wants.
2. It serves as a measure (unit) of value. All goods and services can be priced in money, giving a common yardstick for comparing values that barter could not provide.
3. It is a store of value. Money can be saved and used later without losing much value, whereas many barter goods (such as yam or fish) are perishable and cannot be stored.
4. It acts as a standard for deferred (future) payments. Debts, loans and credit transactions can be fixed and settled in money over time, which is difficult under barter.
5. It is portable and divisible. Money is easy to carry and can be broken into smaller units, so small and large transactions are both possible, unlike indivisible barter goods such as a live cow.

Examination reminder: the strongest single reason is the removal of the double coincidence of wants; state it first and then link the remaining reasons to the four functions of money.