Barter System- People used to trade with each other even before money was invented. In Barter system people exchanges services and goods in exchange for other services and goods.
Pros of Barter System-
- Simplest form of trade.
- No need to worry about the foreign exchange.
- No danger of fake or counterfeit currency.
Cons of Barter System-
- Double coincidence of wants is necessary.
- Search cost adds to cost of transaction.
- Loss of values in case of perishable commodities.
- No division of labour and specialisation– Since every person is a trader and for self existence a person try to produce everything from himself. This lead to a situation where no one is specialised in producing one thing. Therefore overall efficiency of the economy is very low. Moreover finding all goods of necessity is difficult.
- Problem of frangibility – This problem explains the situation when the product is not dividable for trade. For eg, if a Big Diamond equates to 1 horse or 2 donkeys and the trader have only one Big Diamond and wants a donkey. Than even if he breaks the Diamond into half the value reduces more than 50% for the diamond, therefore though he have the product much valuable and even double coincidence of want is also present but than also there could not be any trade possible.
Precious stones, tomatoes, shares, bonds, debentures are non fungible items. Whereas, Gold, metals and currency notes are fungible items.
Barter system limitations paved way for the invention of money.
Primary Function of money are –
- Measure of Value – Money is both divisible and fungible, even it is used to measure the value of factors of production- Land, Labour, Capital and even companies, government and country in the form of rent/sq-ft., Wages, interest or dividend, Profit and loss, budget for the country and Net flow of good n services (GDP), respectively.
- Medium of exchange/transaction– Since money is durable, portable, fungible, and difficult to counterfeit it is being accepted by all the people around the globe for the medium of transaction against any goods or services.
The primary function of money paved the way for the secondary function of money. Secondly function are just the benefits that one is not intended to get when he move towards the product but is there. For example, the primary function of the duster in the class is to rub the handwritten notes from the board. But the secondary function of it, for which it is usually used is by hitting it hard in the class and make the class silent. Though for this purpose, the duster was never purchased.
So secondary function of money is –
- Store of value – Money can be stored for longer time, unlike the tomatoes in barter system which are perishable.
- Transfer of Value – It can be easily exchanged between the parties who are there to exchange goods n services.
- Standard of Deferred Payments– Since it is possible to calculate the time value of money and therefore the interest therein accumulated, one can buy and sell in partial payments and EMI’s option.
Now we will talk about the other functions which the society have taken out from the money system for overall development of the surroundings, socially and economically.
These functions are termed as Contingent functions of money-
- Money helps in mobilising factors of production– Since everyone in this planet accepted the need and want of money to fulfil their dreams therefore it has become easier to remunerate and compensate the Labours and Capital owners to mobilise towards a goal of production or value addition.
- Circular flow of income and role of financial intermediaries– With the development of money there is a huge growth in flow of goods and services. Even the tax collection for the government or monarch is increased because of the rising economic activities. As in turn, the role of financial institutions and their establishment has become prominent where one can use their services and get benefited by them when in need of capital for production activity. This gives the society a greater return overall as more and more of goods and services are available in the society. But with increasing goods n services their is also increase in the tax or revenue collection of the government. Which aims to provide the socials schemes and infrastructure to the needy. By collecting more tax from the rich it helps to bring out the disparity of Rich and Poor in the society. Secondly, redistribution of wealth from rich to poor is possible by this function of money.
So we can rightly say that, “Money is not the cause of all the problems but greed is.”
We will continue to discuss more about economics in the next post. Till than thanks everyone who read it.
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