Barter System - Examples , Problems , Characterstics // Evolution of Money.

 

BARTER SYSTEM AND Evolution of MONEY

 

Define Barter System.

Barter system is the primitive time system which was used for direct exchange of the goods. One commodity for other. In other words it is known as Commodity to commodity economy "CtoC"  economy that is commodity to commodity.

 

Barter System

CONTENTS :

What is barter system?
Difficulties in Barter system?
What gave rise to currency notes, money in the economy?
What is money?
Evolution of Money?
Functions of Money?

 

 

 

Barter system is the primitive time system which was used for direct exchange of the goods. One commodity for other. In other words it is known as Commodity to commodity economy "CtoC"  economy that is commodity to commodity. Barter system was used in older times when our needs were simple and non complex .

Example of Barter System

A farmer 2 kg of rice and want it to exchange with 2 piece of cloth therefore this system (barter) exists only where there is double coincidence of wants.

That is there is direct exchange without any intermediary.

 

Barter System

With the civilisation the needs become complex and with this their were arising difficulties in the Barter system.

 

Problems Of Barter System

 

1. Double Coincidence of Wants:

 

When there is a lack of a medium of exchange, a difficult problem of double coincidence of wants was faced by the people .

For exchange of goods in the barter system it is necessary that the person selling a particular good is also needed by a particular buyer. On the other hand the person wanting to buy a good needs to correspond with a person selling the same. If there is a non coincidence then the entire trade or exchange would fail. This is a serious limitation of the barter system which was faced. Barter system cab work only when both the buyer and seller are ready to exchange each others goods.

 

 

2. Lack of a Standard Unit of Account/ Common Measure

 

In the barter system there is a lack of not only a common medium of exchange but also a standard unit of account in terms of which prices could be measured and quoted.

 

 Under the absence of a common unit of measure /account, the numbers of exchange ratios between goods are very large. With a lack of a standard unit of account with which to measure values of different goods and services exchangeand trade becomes very difficult. In such a case one person usually gains and other sacrifices

 For example If A has wheat and B has rice, then it is difficult to decide, how much wheat is needed to exchange with one kilogram of rice. In absence of common measure, the exchange ratios is fixed randomly, in which one the party generally suffers.

 

 

3.  Lack of Subdivision of Goods:

 

The other problem faced in the barter system for exchange of goods was lack of subdivision of goods. In this you might have a person who owns a horse and wants to exchange shoes . However if the value of the shoes is half the value of the horse , the horse could not be exchanged. This means that under such cases the exchange is not possible. This emerges as a serious problem.

 

4. Lack of Standard of Deferred Payments:

 

Another drawback of barter is that it lacks a standard of deferred payments. This means  that contracts involving future payments or loan transactions cannot take place in the barter system. Thus Credit transactions cannot be take place in case of Barter system easily

 

5. Lack of Efficient Store of Value:

 

In the barter system a great inconvenience is the lack of facility to store value. Here there is a lack of existence of a generalized purchasing power. This is especially difficult in case of perishable goods. Storing wealth under the system is very difficult and costly. Storing under the system involves great risk. 

 

 

To conclude we can say that it is true that the Barter system faced many difficulties in the past. This is why to make trade and exchange easier, a common medium of exchange "Money" was developed and gave rise to Concept of MONEY .

 

Money is anything which is widely accepted as a medium of exchange and has measure of value for the exchange of goods and services and to meet our financial and household obligation.

 

The term Money is used to cover all such things like coins, currency notes, cheque's etc which are used to conduct business settlements and transactions in due course of business or non business activities taking place

 

 

EVOLUTION OF MONEY :

Money in the due course of time had evolved in Six major ways.

 

·        Commodity Money
·        Metallic Money
·        Paper Money
·        Credit Money
·        Plastic Money
·        Digital Money

Evolution of Money

 

1)Commodity Money

 In the initial phase of Civilization, any commodity / goods are generally exchanged in goods only, which is commonly known as Barter exchange

 

2) Metallic Money

 With the changing and progressive Civilization, money changed into Metallic money. Metal like gold, silver, copper were used as they were portable easy to carry and can be easily ascertained.

 

3) Paper Money

 Since Gold and silver were termed as precious metals it was inconvenient to carry them from place to place.Therefore paper money was regulated and controlled in the economy by the central bank of the country.

 

4) Credit Money

 With the growing time people keep a part of their cash in banks which they can withdraw at their convenience using cheque's. Therefore it is known as credit money

 

5) Plastic Money

 The types of credit cards and debit cards were came into existence with an aim to removing the need for carrying cash to make transactions

 

6) Digital Money

The most latest type of Money being introduced to the Economy is the Digital Money with an aim to make a cashless economy and more digitalized in order to make the transactions more swift easy and convenient.

 

Money

Money may be define as the thing through which other things – products and services can be purchased.

It acts as the medium of Exchange , which helps the person to get things in return of money.

 

Money and it's Evolution takes place since the Human civilization.

The concept of Money and it's concept is as important as its Functions.

Following are various Functions of Money which it performs in our day to day lives.

Money

 

Advantages of money over Barter System

FUNCTIONS OF MONEY :

 

ü  Primary function.           

·         Medium of exchange    

·         Measure of value.       

                                         

ü  Secondary Function

·         Standard of Deffered Payment

·         Store of Value

 

1)Medium of exchange

When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange

 

2)Measure of value

It is a standard numerical unit of measurement of market value of goods, services, and other transactions. It is a standard of relative worth and deferred payment, and as such is a necessary prerequisite for the formulation of commercial agreements that involve debt. To function as a unit of account, money must be divisible into smaller units without loss of value, fungible (one unit or piece must be perceived as equivalent to any other), and a specific weight or size to be verifiably countable.

 

3)Store of value

To act as a store of value, money must be reliably saved, stored, and retrieved. It must be predictably usable as a medium of exchange when it is retrieved. Additionally, the value of money must remain stable over time.

 

Advantage of Money

4)  Standard of deferred payments

Money now can be used as a standard of future payments that is money can now be used to make payment of any future obligation.

 

With this we conclude the topic Barter system and the Concept of Money and it's functions.