BARTER SYSTEM......

Inconveniences of Barter System;

Before the introduction of money, the following difficulties and inconveniences we

experienced in the barter system.

Double CojncWence of Wants/The direct exchange.pf one commodity for anoth

requires direct satisfaction of both the parties in the'bargain^ The exchange can or

be effective if a person is able to spare what the other person wants and at the san

time needs what the other can sparer For instance, a person has surplus wheat wi

him and wishes to exchange it with cloth He will have to find a person who not or

possesses sufficient cloth but also desires wheat. This double coincidence, as

obvious, is very difficult to attain in this civilised world especiallywhere the range

human wants is very wide The transactions cost of double coincidence of wants a

very high

Lack of Common Measure. Another difficulty which arises under the system

Darter is the absence of common measure which can help in the estimation

relative values of the two commodities/ For instance, a man has a horse with him ar

the other a cow and both are willing to trade. A man who has a horse assigns th

value of one horse as two cows. The other who has a cow desigris the value of or

cow as one horse and both stick to their respective valuations/In the absence

common measure of value, the exchange between the two parties cannot take plac

' unless both of them assign the same value to different commodities which th(

3. Lack of Sub-divisions. One serious drawback of barter is that even when doub

coincidence of wants exists' between the two parties, the exchange may not tat"

place even then. This is particularly the case in those commodities which cannot t

sub-divided/ For instance, a person has a cow with him and he wishes to get 40 kik

of wheat It is clear that the value of the cow is much more than the value of 40 kik of wheat. What part of the cow should be given in exchange for 40 kilos of wheat? Just imagine, if the cow is cut into pieces, what value can it command?

Lack of Store of value. Another serious inconvenience which arises under barter is

that the goods particularly perishable ones cannot be stored for a longer period. They

lose their value as time passes on.

Specialization not possible. Under the barter economy each person is a jacK of all

trades and master of none. A high degree of specialization cannot be achieved under

it.

Payments in the future. Under the system of barter, it is very inconvenient to lend

goods to other people. With the lapse of time, the value of the commodities may fall.

So it becomes difficult to make payments in the future.

Difficulties of Transfer of Wealth. There is great difficulty in transferring wealth

from one place to another under barter. For instance, if a person has to take one

hundred heads of cattle from Faisalabad to Karachi, how much difficult would he

feel? The risk and inconvenience of transportation is a major difficulty of barter

system.

Difficulties in tax collection. Another difficulty which arises under barter system is

that the tax cannot be collected in the form of goods, If the commodities are collected

from the tax payers, they will not only lose value as time passes on but are difficult to

store also.

The inconveniences of barter account for the emergency of money With the introduction of money, the difficulties of double coincidence of wants, the inconveniences of tack of division, the drawbacks of store of value etc.. etc., have been removed to a great extent.

How money has removed the difficulties of barter system?

The use of money has converted a barter economy into a monetary economy. The money has over come the difficulties of barter system in the following ways.

Use of money. Money is used now as a (i) Medium of exchange. The goods and

services are now purchased and sold with the help of money The difficulty of double

coincidence of demand has been removed with the help of money, (ii) Money now

serves as a common measure of value. The problem of comparing the prices of

goods and services in the market is now simplified, fiii) With the help of money, the

exchange of present goods on credit has been made easier. The problem of

deferred payments has been satisfactorily solved with the help of money, (iv) Money

as a liquid store of value has facilitated its possessor to purchase any other asset at

any time, (v) Through money value can be easily and quickly transferred from one

place to another.

Liquidity to wealth. Money imparts liquidity to various forms of wealth such as land,

machinery, stocks stores etc. These forms of wealth can be easily converted into

money.

Establishment of financial institutions. The introduction of money has made it

possible to establish financial institutions like the central bank, commercial banks etc

which deal in currency and near money assets such as bills of exchange, bond,

shares etc.

BARTER SYSTEM 100 % Complete Details

MEANING OF BARTER -'-

Barter means direct exchange of goods for good Barter system was prevalent at an early stage of man's economic life when the wants were very limited in number. Man could easily satisfy all his wants which he produced himself. But as time passed, his needs, began to increase. He lost his self-sufficiency He began to produce some goods in greater quantity than he could consume himself. The purpose was to exchange some of his products which he had in excess with those who had surplus products with Barter exists more in economically backward and commercially under-develop areas of the world. Why to go far off, in many of the Pakistani villages, the payment village artisan is still made in kind. Women and children in the villages get sugar, clo spices, toys, sweetmeats, etc., etc., directly in exchange for ghee, cotton seeds, whe. etc., from the village shopkeepers. In advanced countries of the world, we do not cor across the exchange of this type in their daily business. It is because the range of war and the range of commodities are so wide that it is actually impossible to satisfy the through a direct exchange of goods. In modern economy, inside the country, goods a not exchanged for goods but for money, if we want to sell anything in the market, \ quote its price in money and receive money for it. Similarly, if we need anything from tl market, we find its price expressed in terms of money.

Here a question can be asked as to how this system of barter is foui inconvenient and why it has been given up by the civilised world? The answer this question is that barter system was found inconvenient and so given up due to tl reasons given below.

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Convertible. Convertible paper money. In the evolution of money, the second

stage was the discovery of convertible paper money as commodity money substitute.

The convertible paper money is paper money that may be redeemed for a specific

commodity at a rate specified on the currency. Before 1914, the bulk of bank notes

were convertible into gold. The bank notes of various denominations (£1, £10, £100)

had a promise a by the bank to pay to the bearer a specific amount of gold on

demand. The practice of exchanging paper currency for gold was eliminated after

1914 in England and in 1933 in America. In today's economy, the paper notes are

inconvertible notes. They are neither fully nor .fractionally convertible into gold. The

statement written on bank notes "I promise to pay the bearer on demand...." is

worthless. This paper money developed into inconvertible money is called Fiat

money.

Fiat Money. Fiat money'consists of paper money that derives its status as money

from the power of the-state. Fiat money is money because government says it is

money. It is not backed by promise to pay something of intrinsic value. It is accepted

because the government declares it a legal tender The creditors must accept it as a

medium of exchange and as payments for debts.

Credit Money. Another most important component of money supply is the deposit

money or credit money. Deposit money consists of deposits at banks and the

financial institutions which are subject to withdrawal by cheques. In developed

countries of the world, 95% of transactions are carried on with cheques. Cheques are

a safe way of transferring the ownership of deposits in financial institutions. They are

normally acceptable as a medium of exchange.

Electronic Banking Stage. In all the developed and in many developing countries of

the world, including Pakistan, the commercial banks have entered into an era of

electronic banking. The customers of banks having deposits in their accounts can

make purchases, pay bills, transfer money simply by electronic signals.

It may here be noted that currency deposits at banks and other financial institutions are money but cheques are not money A cheque is a transfer order enabling transfer of money Cheques are not legal tender and cannot be enforced in payments of debts. So is the case with plastic credit cards. The customer can make purchases by credit card upto his credit limit The credit card in itself is not money because it is not legal tender for making payment. Your card is not a unit of account, a store of value or a standard of deferred payment.

STAGES IN DEVELOPMENT OF MONEY

STAGES IN DEVELOPMENT OF MONEY

Evolution of Money

Throughout the history of civilization, money has passed through different stages. Historically, the development of money in the present form has evolved through the following stages:

(i) Commodity money

(ii) Convertible paper money

(iii) Fiat money and

(iv) Deposit money. These stages are discussed in brief below.

1. Commodity money. The earliest money which came into use and was accepted in exchange of goods for goods was commodity money. A large number of items such as wheat, cotton, skins, arrows, bows, camels, goats etc. etc. have served as commodity money at different times and places depending upon the stage of .elopment in that country. As time passed on it was found that these commodities were not best suited as general means of making payments.

The main problems with commocf'ty money were that they lacked (a) durability (b) portability (c) divisibility into smaller units (d) uniformity and standardization (e) regularity in supply (f) and had high opportunity cost. So search was made to find and more suitable and convenient mean which is generally acceptable in payments for the goods and services sold. The search led to the discovery of precious metals like copper, silver and gold.

Commodity money is the money that has a value apart from its use as money.

A large number of items has served as commodity money at different times and places. In primitive agricultural stage, domestic animals like cattle, goats, horses, cows, sheep, rice grains etc. were used as money. As time passed on, it was found that these commodities were not best suited as general means of making payments because there were difficulties in storing them. They also lacked the essentials of durability, transportability, divisibility, homogeneity etc. So a search was made to find out a more economic means of making payments. The search led to the discovery of precious metals of gold, silver and copper.

Metallic Money. The next form of commodity money was the use of uncoined metals such as gold, silver, copper as medium of exchange. Such coins had an intrinsic value (value in themselves) which was reflected in their face value. The use of uncoined metals as a medium of exchange created further difficulties. It became difficult for the people to know the weight and value of the piece of bullion at sight, The discovery of mines of gold and silver and their exhaustion caused fluctuations in the supply of money. Transportation and storage of precious metals also became dangerous. Debasement of metal further caused inconvenience and complications in exchange. Further advancement in the evolution of commodity money was the replacement of unstandardized metal ingots with a standardized coinage. The metallic coins had a guaranteed weight of value by a competent authority.they had time these full bodied coins also proved a failure as a good medium of exchange, Coins were clipped, abraded, and melted down. They were also debased. With the discovery or exhaustion of mines, the intrinsic worth of the coins began to depart from their face value. Transportation and storage of metals also became inconvenient and dangerous. Efforts were then made to find out a better unit of account.

THE NATURE AND FUNCTIONS OF MONEY

THE NATURE AND FUNCTIONS OF MONEY

1. WHAT IS MONEY

Money is one of the wonderful inventions of man. The pity is that it has no precise definition The economists have given different definitions of it and they have so far not agreed on the specific meaning of money i.e. how to define and how to measure money. Broadly, the term 'money' has been described in two different ways. Functional view and (b) General acceptability view:

(i)

Functional view. According to Walker "Money is what money does". This is a

purely functional definition of money. Traditionally, money serves four functions (a) a medium of exchange (b) a unit of account (c) a store of value and (d) a standard of deferred payments. So following this definition, anything which may be metallic coins, paper currency, cheques, bills of exchange etc. which serves these four functions could be considered money.

General acceptability view. The modern economists are of the view that a suitable definition of money should point out not only the four major functions of money but also possess the basic feature of 'General acceptability'. Money should be a commodity which is generally acceptable by the society in payment for goods and services and in the repayments of debts. According to Crowther, "Money can be defined as anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and store of value". In the words of "D. H. Robertson", anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations is called money".

Money is different from wealth and income. Wealth is the total resources owned by the individual or business. It includes money and other assets such as bonds, car, land, house etc. Income is a flow of earnings per unit of time i.e., day, week, month etc,

NEAR MONEY

The money and assets whicn can be easily and quickly transferred into money without loss in value are called near monies. Near money cannot be directly used for making payments. There are first to be converted into proper money as and when needed for spending. Near money or non-monetary liquid assets chiefly consist of time deposit, treasury bills, government securities, saving bonds,

As near monies can be easily converted into currency or demand deposits, it has important bearing on the economic health of the economy. The increase or decrease in the holding of near money affects the rate of communities saving and spending. The greater the amount of wealth in the form of near monies, the greater is the tendency of the community to consume out of this income. Secondly, as the near monies can be easily converted into cash, it directly affects the money supply.

Components of Money Supply

In Pakistan, the main components of money supply are:

(1) M1 = Currency in circulation +• Demand deposits of saving banks + Other deposits with State Bank of Pakistan.

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THE NATURE AND FUNCTIONS OF MONEY

THE NATURE AND FUNCTIONS OF MONEY

1. WHAT IS MONEY

Money is one of the wonderful inventions of man. The pity is that it has no precise definition The economists have given different definitions of it and they have so far not agreed on the specific meaning of money i.e. how to define and how to measure money. Broadly, the term 'money' has been described in two different ways. Functional view and (b) General acceptability view:

(i)

Functional view. According to Walker "Money is what money does". This is a

purely functional definition of money. Traditionally, money serves four functions (a) a medium of exchange (b) a unit of account (c) a store of value and (d) a standard of deferred payments. So following this definition, anything which may be metallic coins, paper currency, cheques, bills of exchange etc. which serves these four functions could be considered money.

General acceptability view. The modern economists are of the view that a suitable definition of money should point out not only the four major functions of money but also possess the basic feature of 'General acceptability'. Money should be a commodity which is generally acceptable by the society in payment for goods and services and in the repayments of debts. According to Crowther, "Money can be defined as anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and store of value". In the words of "D. H. Robertson", anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations is called money".

Money is different from wealth and income. Wealth is the total resources owned by the individual or business. It includes money and other assets such as bonds, car, land, house etc. Income is a flow of earnings per unit of time i.e., day, week, month etc,

NEAR MONEY

The money and assets whicn can be easily and quickly transferred into money without loss in value are called near monies. Near money cannot be directly used for making payments. There are first to be converted into proper money as and when needed for spending. Near money or non-monetary liquid assets chiefly consist of time deposit, treasury bills, government securities, saving bonds,

As near monies can be easily converted into currency or demand deposits, it has important bearing on the economic health of the economy. The increase or decrease in the holding of near money affects the rate of communities saving and spending. The greater the amount of wealth in the form of near monies, the greater is the tendency of the community to consume out of this income. Secondly, as the near monies can be easily converted into cash, it directly affects the money supply.

Components of Money Supply

In Pakistan, the main components of money supply are:

(1) M1 = Currency in circulation +• Demand deposits of saving banks + Other deposits with State Bank of Pakistan.

accounting Details accounting Notes i Com Notes B com Notes Matric Notes first year Notes 2nd year Notes. i Com Complete Course Details B.com Complete Course Details. B.com Fee structure I Com Fees.