Barter System and Value of Money Free Essay Example

Problem of barter system? How dose money solve it

Barter system is a traditional system in which people sell goods and services in order to obtain other goods and services through direct exchange without the mediation of money. But there is some problem of barter system. The problem of barter system are given below

The first difficulties of barter system are lack of account. It is obvious that under pure barter exchange only a very primitive economy where people produced and exchanged only very few goods and services could exist the existence of the modern highly developed economies, which have provided people the immerge benefits of mass scale production and consumption of millions of goods and services made possible under highly developed form of money and credit exchange system, which unthinkable under barter system.

Since in this system there was no scope for prating specialization and division of labors in production under barter system. It is a also impossible to utilize the production capacity.

Lack of a double coincidence of wants: the second’s serious difficulty of barter system was the lack of a double coincidence of wants. In a barter system a seller of a commodity must not only find some person who is willing to give some value for it but he must find someone who is willing to give in exchange some commodity which is wanted by the seller. In barter system it would very rarely happened. For example- suppose a person possessed cloth which he wanted to barter of milk he could not succeed in acquiring mild unit he met some one who not only had milk to barter but was only willing to acquire cloth for milk.

o it arise difficulty form the lack of double coincidence of wants. Lack of medium of exchange: in barter system another difficulties is lack of medium of exchange for this reason it arise money problem in future payments of wages, salaries, interest, rant and other prices or in any contractual payments. The main three problem are-

1. A controversy often arose regarding the quality of the goods on services which could be given accepted in payment.
2. Frequently the two parties disagreed about the specific commodity which could be given and accepted in repayment.
3. Great risk was involved for both the constricting parties since the commodity to be repaid could perceptibly increased or decrease in value over the duration of the contract.

Lack of stone of value. A pure barter economy suffered from the disadvantage of any reliable method made possible under the highly developed from of money and credit exchange. The difficulties of lack of a double coincidence of wants can be solved by money. If there was money then seller can sell the product and earned money and also seller will able to purchase the product that he needed. or lacking of the medium of exchange it arise money problem in future payment but if the money is used for the medium of exchange than the problem can be solved easily. Also lack of store of value can be solved by money in barter system people store wealth or purchasing power in commodity but it is very rising to maintain the quality after replace in the place of commodity then there is a no risk it maintain the same quality after few year. And people can easily purchase his commodity any time.

Explain the concept of value of money. How value of money is is determined according to Fisher’s theory

Value of money

Value of money means the purchasing power of it. In other word value of money means by which we can purchase the goods and services the value of money is tow types-

1. External purchasing power
2. Internal purchasing power

Internal purchasing power means the value of money buy. Internal purchasing power of money means the purchasing power of goods and services within the country.

External purchasing power refers the external exchange rate. Its means the relation between the internal exchange rate with external exchange rate. Value of money has vice versa relation with the value of goods service. Again value of money has vice-versa relation with quantity of money. We can show it in an equation. Increased of quantity of money ==> increased the value of goods and service==> decrease the value of money In mathematical form VM= f (m) ? dvm ? dm = f(m)