The Development of Barter and the Role of Money

Objectives

• Explain the development of barter

• Describe the role of money.

Key Terms

• Barter: The exchange of goods or services for other goods and services without the use of money.

• Double coincidence of wants: The situation that arises when two people each want what the other has to offer.

• Surplus production: Output in excess of what a producer requires for their own use.

• Money: Anything that serves as a generally acceptable means of exchange, including physical objects like cowrie shells, paper money, cards, and electronic forms of payment.

• Deferred payments: Payments made in the future for a current debt.

Development of Barter

• Before money, people exchanged surplus goods through barter.

• Example: A farmer exchanges surplus grain for hens from another farmer.

• Bartering requires a double coincidence of wants.

Advantages of Barter

• Access to goods not produced by an individual.

• People can specialize in producing what they are best at.

• Surplus production can be traded directly.

Disadvantages of Barter

• Requires finding someone willing to barter (double coincidence of wants).

• No common measure of value hinders exchanges.

• Difficult to save bartered goods like one saves money.

• Some goods cannot be broken into smaller units for trade.

• Difficult to transport certain goods after exchange.

The Role of Money

• Money is widely accepted as a means of exchange, facilitating an efficient trading system compared to barter.

• Types of early money included cowrie shells and precious metals.

• Characteristics of effective money:

  • Scarcity: The item must be in relatively scarce supply.

  • Acceptability: The item must be generally accepted as payment.

  • Portability: It should be easy to carry.

  • Durability: It must be hard-wearing and long-lasting.

  • Divisibility: It should consist of units that can be broken down into smaller denominations.

Key Points

• Barter involves an exchange of goods/services without money.

• The development of money has reduced reliance on barter, allowing for more efficient transactions.

• Money functions as a generally accepted means of exchange.

Summary Questions

1. How does the use of money overcome three weaknesses of barter?

2. What properties do notes and coins have that make them good forms of money?

3. Explain how a $10 note serves each of the four functions of money.