(a) What is commodity money? (b) Identify any three problems associated with trade by barter. (c) Explain any three ways by which the advent of money has so...
Question 1 Report
(a) What is commodity money?
(b) Identify any three problems associated with trade by barter.
(c) Explain any three ways by which the advent of money has solved the problems of the barter system.
Answer Details
(a) Commodity money is money in the form of a good that has value in itself (intrinsic value) and is also generally accepted as a medium of exchange. Examples include cowries, gold, salt, and cattle used as money in earlier societies.
(b) Three problems of trade by barter:
- Double coincidence of wants: each trader must find someone who has what he wants and also wants what he has, which is difficult.
- 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 some goods: valuable items such as a cow cannot be split to pay for a small purchase.
- Difficulty in storing value: many goods (e.g. farm produce) perish and cannot store wealth over time.
(c) Three ways money has solved these problems:
- Medium of exchange: money is generally accepted, so a seller takes money and later spends it, removing the need for a double coincidence of wants.
- Measure/unit of value: the prices of all goods are stated in money, giving a common yardstick for comparing values.
- Store of value: money can be saved and kept without perishing, so wealth can be held and used later; being divisible into small units, it also solves the problem of indivisibility.
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