TOPIC 4: MONEY | COMMERCE FORM 3

Lack of Double Coincidence of Wants:Barter
transactions can be possible only when two persons desiring exchange of
commodities should have such commodities which are mutually needed by
each other. For example, if Fatma wants cloth, which Tully has, then
Fatma should have such commod­ity which Tully wants. In the absence of
such coincidence of wants, there will be no exchange. How­ever, it is
very difficult to find such persons where there is coincidence of wants.
One had to face such difficulties in barter economy because of which
this system had to be abandoned.

Indivisibility of some commodities:The
second difficulty of barter exchange relates to the exchange of such
commodities which cannot be divided. For example, a person has a cow and
he wants cloth, food grains and other items of consumption. Under such a
condition, exchange can be possible only when he dis­covers a person,
who is in need of a cow and has all such commodities, but it is very
difficult to get such a person. Then how to affect the
exchange.Similarly the second problem relates to the exchange of such
commodities which cannot be divided into pieces, because in this kind of
situation, a big commodity like cow cannot be divided into small pieces
for making payment of the goods of smaller value.

Lack of a Common Measure of Value:The
biggest problem in the barter exchange was the lack of common measure
of value i.e., there was no such commodity in lieu of which all
commodities could be bought and sold. In such a situation, while
facilitating the exchange of a commodity its value was to be expressed
in all commodities, such as one yard cloth is equal to ½ kilogram of
potato etc. It was a very difficult proposition and made exchange
virtually impossible. Now, with the discovery of money, this difficulty
has been totally eliminated.

Lack of Store of Value:In
a barter economy, the store of value could be done only in the form of
commodities. However, we all know that commodities are perishable and
they cannot be kept for a long time in the store. Because of this
difficulty, the accumulation of capital or store of value was very
difficult and without the accumulation of capital, economic progress
could not be made. It is because of this reason that as long as barter
system continued, significant progress was not made in the world
anywhere.

The
risk of theft is lower in barter system than the risk of using money.
Almost all modern forms of money can easily be stolen and are more
vulnerable to theft than commodities.

The value of commodities
tends to be stable over a long period of tme, unlike the value of money
which depreciates in value after a certain period of time. Due to
depreciation in value, money plays little role as a future store of
value.

Barter trade is very useful in non-monetary economies,
where money is too scarce to be used as a medium of exchange. For
example, in rural areas barter trade is widely applied due to scarcity
of money.

Medium of exchange:
Money’s most important function is as a medium of exchange to
facilitate transactions. Without money, all transactions would have to
be conducted bybarter, which involves direct exchange of one good or
service for another. The difficulty with abarter systemis that in order
to obtain a particular good or service from a supplier, one has to
possess a good or service of equal value, which the supplier also
desires.

In other words, in a barter system, exchange can take placeonlyif
there is adouble coincidence of wantsbetween two transacting parties.
The likelihood of a double coincidence of wants, however, is small and
makes the exchange of goods and services rather difficult. Money
effectively eliminates the double coincidence of wants problem by
serving as a medium of exchange that is accepted in all transactions, by
all parties, regardless of whether they desire each others’ goods and
services.

Store of value: In order to be a
medium of exchange, money must hold its value over time; that is, it
must be a store of value. If money could not be stored for some period
of time and still remain valuable in exchange, it would not solve the
double coincidence of wants problem and therefore would not be adopted
as a medium of exchange.

As a store of value, money is not unique; many
other stores of value exist, such as land, works of art, and even
baseball cards and stamps. Money may not even be the best store of value
because it depreciates with inflation. However, money is moreliquidthan
most other stores of value because as a medium of exchange, it is
readily accepted everywhere. Furthermore, money is an easily transported
store of value that is available in a number of convenient
denominations.

Unit of account:Money also functions as a unit of account, providing acommon measure of the valueof
goods and services being exchanged. Knowing the value or price of a
good, in terms of money, enables both the supplier and the purchaser of
the good to make decisions about how much of the good to supply and how
much of the good to purchase.

• Inflation rate=price in current year-price in previous year x100 / Price in previous year

• =200-100×100 / 100
• =100%

Excessive demand for goods and services.

When
demand for goods increase while supply remains constant it underscores a
rise in price and if the rise is persistent it results in inflation.

Shortage of goods and services.

Increase in cost of production

Increase in government spending

Illegal
activities such as smuggling causes artificial shortage of goods and
therefore rise in the prices of goods consequently inflation occurs.

Natural calamities.