Lesson 4.1: Barter and Money

Barter

  • A trade in which goods are exchanged for other goods, not using money or any other medium of exchange

    • No money is used, requiring people in a trade to have aligning wants from each other

  • One of the oldest and simplest forms of commerce

  • Typically between two parties, but can involve three or more

    • This can create the issue of having a limited circle of trade — to avoid bad deals, trust must be built up

Advantages

  • Simplicity: it is a simple system lacking the complexity of a modern monetary system

  • No concentration of power: power is distributed as commodity storage is abolished

  • Ideal utilization of resources: resources are ideally utilized to meet societal needs without waste

  • Division of labor: some division of labor occurs to ensure non-self-sufficiency

Disadvantages

  • Double coincidence of wants: the people in a trade must have something the other wants to execute a trade, which rarely occurs

  • No common measure of value: an exact value cannot be assigned to a good or service; every good must be expressed in terms of a proportion of every other good, requiring agreement on proportions

  • Indivisibility of goods: not all goods can be divided or subdivided; problems may arise when trading larger indivisible items for smaller items

  • No storage of value: the value of items may decrease oer time due to physical deterioration or a change in tastes; it may be expensive to store specific goods for a long time

  • Inconvenience of transportation: goods or services may not be convenient for transfer from one place to another

Money

  • Anything that is generally accepted as payment for goods and services for debt repayment

Functions of Money

  • Medium of exchange: money acts as an intermediary between buyer and seller to avoid the problem of having a double coincidence of wants

    • This helps increase the incidence of trade

  • Store of value: money can be saved, retrieved, and exchanged in the future without deteriorating in value

    • Does not require that money is a perfect store of value — inflation may reduce buying power, but it remains money

    • In contrast, using salt or cows in a barter system may lead to your dissolution of your 401(k) in a lake or the inadvertent transformation of your 529 into a steak

  • Unit of account: money is the ruler by which other values are measured, acting as a common denominator that simplifies thinking about trade-offs

Characteristics of Money

  • The coins and paper bills used as money are called currency

    • Cattle, salt, dried fish, furs, precious stones, gold, silver, porpoise teeth, rice, wheat, seashells, tulip bulbs, olive oil, and Nuka-Cola bottle caps have all served as currency at various times in various places

  • There are six main characteristics:

    • Durability: money should be able to withstand the wear and tear of constant use

    • Portability: money should be small, light, and easily carried

    • Disvisibility: money should be capable of being divided into smaller units

    • Uniformity: any two units of currency must be the same in terms of what they will buy

    • Limited Supply: there should be limited supply to maintain value

    • Acceptability: everyone in an economy must be able to take the objects that serve as money and exchange them for goods or services

Sources of Money’s Value

  • Despite being worthless by itself, three different factors may contribute to money’s value:

    • Commodities: Objects that have value in and of themselves may be used as money

    • Representations: Objects have value because they can be exchanged for something else of value

      • Paper reciepts for gold or silver, as shown in Silver Certificates made until 1958

      • Gold or silver certificates

    • Fiat: Objects that have value because a government has decreed that they are an acceptable means to pay debts

      • The United States’ currency is backed by the Federal Reserve instead