(a) State five problems of barter system of trading (b) Explain five ways in which the introduction of money has solved the problems stated in 3 (a) above.

Answer Details

(a) Five problems of the barter system of trading

• Lack of double coincidence of wants: each trader must find another who has what he wants and also wants what he has, which is difficult.
• Absence of a common measure of value: there is no standard unit for expressing and comparing the values of different goods.
• Indivisibility of some goods: some goods, such as a cow or a house, cannot be divided into smaller parts to match the value of what is wanted.
• Difficulty in storing wealth: many goods, especially perishables like yam or fish, cannot be stored to keep value for the future.
• Lack of a standard for deferred (future) payments: it is difficult to make and settle debts or credit transactions in goods.

(b) Five ways money has solved these problems

• Medium of exchange: money removes the need for double coincidence of wants; a seller collects money and uses it to buy whatever he needs from anyone.
• Measure of value (unit of account): money provides a common standard in which the value of all goods and services can be expressed and compared.
• Divisibility: money exists in small and large denominations, so goods of any value can be bought and change can be given.
• Store of value: money can be saved and kept without losing its value, allowing wealth to be held for future use.
• Standard of deferred payment: money makes credit transactions easy, since debts can be measured in money and repaid later.