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

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.