Barter

Question 1

Define Barter

Answer 1

Barter is the direct exchange of goods and services for other goods and services without the use of money.

Question 2

Problems associated with barter

Answer 2

Double coincidence of wants – a trader has to find someone who wants his good and has exactly what he wants to trade it for.
Unequal value of exchange/rate of exchange – traders in the barter system have difficulty in determining the relative value of goods.
Impossibility of saving or store of value – Saving of goods requires storage space. some goods are perishable and difficult/ impossible to store.
Indivisibility – some products traded under the barter system is difficult to sub divide into smaller units.

Question 3

Definition of money

Answer 3

Money is anything that is general acceptable in exchange for goods and services.

Question 4

Functions of money

Answer 4

A medium of exchange – money is acceptable as a means of payment for goods and services. The use of money as a medium of exchange removes the problem of double coincidence of wants under the barter system.
A store of value – money can be stored or saved for use at a later date. Money might, therefore, eliminate the
problem of difficulty in saving that is present with barter.
 A unit of account – this means that money is a measure of value. All goods and services can be given prices in terms of money. This function of money helps to eliminate the problem of unequal value of exchange, as prices are quoted exactly in terms of money.
 A standard of deferred payment – this is where money is used as a means of measuring debt and repaying debt.

Question 5

Characteristics/Qualities/Features of money

Answer 5

It must be homogeneous – all units of money must be identical or uniform.
It must be divisible – money must be able to be divided into smaller units.
It must be portable – money must be easy to carry around.
It must be legal tender – this means that a creditor is legally obliged to accept the money in settlement of a debt.
It must be acceptable – everyone must be willing to accept money as a means of settling debts.
It must be durable – money must be long-lasting and not easy to wear away.
It must be relatively scarce or limited in supply – anything which is unlimited in supply will have no economic value and could not serve as money.

Question 6

Definition of Money Economy

Answer 6

A money economy is an economy which uses money as a medium of exchange and a means of payment which replaces the barter system.