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Economics Form 5 Science

Chapter 2 : Money and Banking

Barter System of Trade

          In the past, goods and services were directly exchanged for other goods and services. The direct exchange of goods and services for other goods and services is referred to as trade by barter or barter trade.

        The barter system was effective in primitive or traditional economies where there were little application of division of labour and specialization.

With increasing application of division of labour and specialization over time, the barter system eventually became burdensome with numerous disadvantages.

 Drawbacks or disadvantages of the barter system

  1. Problem of double coincidence of wants: This was the greatest problem faced by the barter system of trade. In the process of barter, became difficult to locate the person who needed what other people had in exchange for what he or she had at any given time. For example; a farmer who had plantains and needed a cutlass was bound to look for a ·blacksmith who did not only have the cutlass but was willing too to exchange his cutlass for the plantains. This was often difficult to achieve and thus wasted a lot of time.

Problem of measurement (measurement problem): During the barter system of trade there was no measuring rod, I. e. There was 

  1. nothing to measure value of goods and services. Where there was double coincidence of wants, people could not easily determine the value and rate of exchange between their commodities. In other words, how much unit of a good should be exchanged for the other was not known in the barter system of trade. Thus with mass production, the system was bound to fail.
  2. Problem of divisibility: During the barter system of trade, it was not possible to divide some goods into smaller units because some goods were only useful as a whole unit and if divided into smaller units it became useless. It was difficult in a barter system for a large and bulky commodity which was not divisible into smaller units to be exchanged for a smaller one.
  3. Problem of portability: During the barter system of trade, it was not possible to carry goods from one place to another because of bulkiness. This made exchange very difficult especially when goods to be traded were bulky or landed.
  4. Problem of deferred payment: lt was not possible to buy goods and postponed payment. This was due to lack of certainty. And the inability to estimate in terms of goods and services the value for future payment.

Money, therefore, is anything that is generally acceptable as a medium of exchange, store of value and unit of account in a given society. Today, there are certain instruments that are generally accepted as a store of value but not as a medium of exchange e. g. Standing Order in a bank, a Certificate of

Deposit Short Term Securities amongst others.

Such instruments are called Near Money because they can easily be, converted into money.

                Similarly, there are other instruments that serve as a medium of exchange but not as a store of value temporally. They are called Money

Substitutes and examples include credit cards, travelers’ cheques amongst others.

par Claude Foumtum
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