Economics SS2 Second term

Week 2:

Contents

  • Definition of Trade by Barter
  • Problems or Disadvantages of Trade by Barter
  • Similarities and Differences between Money and Other Commodities Used for Exchange in Trade by Barter

Definition of Trade by Barter

Definition: Trade by Barter may be defined as a form of trading in which goods are exchanged directly for other goods without the use of money as a medium of exchange. For example, if someone has garri and is in need of beans, he must locate somebody who has beans and is in need of garri. Trade by Barter has many setbacks.

Problems or Disadvantages of Trade by Barter

  1. Problems of Double Coincidence of wants: This involves looking for someone who is in need of what you have and at the same time has what you need. To do this amounts to a very serious problem.
  2. No Fixed rate of Exchange: There is the problem of exchange rate determination between two products. Different rates of exchange have to be determined to cover every transaction before it can take place, e.g. How much of apples can you exchange for Rice.
  3. Wastage of Time and Effort: Barter system leads to waste of time and energy because one has to search for somebody to exchange the goods with.
  4. Problems of Indivisibility: Many goods cannot be divided into small convenient units because they are heavy and indivisible so it does not encourage divisibility.
  5. Problems Created by Bulkiness of some Goods: Some of the good to be exchanged are so bulky that one finds it difficult to carry them about.
  6. No Room for Deferred Payment: In Trade by Barter, there is no room for deferred payment. One cannot collect certain goods and hope to pay another day. Barter requires immediate settlement.
  7. It Discourages Borrowing and Lending: Borrowing and lending under trade by barter is practically impossible as there is no standard unit of measurement.
  8. It Discourages Large Scale Production: As a result of the difficulties in the system of exchange by barter, it therefore leads to people producing goods only for themselves and that of their immediate family. In other words, Trade by barter encourages self sufficiency hence it limits specialization of labour.
  9. Difficulty in Storing Wealth: The barter system, unlike money does not encourage storage of wealth. It is difficult to store wealth or value, especially where perishable goods like fresh tomatoes and onions are involved.

Similarities and Differences between Money and Other Commodities Used for Exchange in Trade by Barter.

Similarities

  • There is fluctuation in the values of money and other commodities
  • Money and other commodities are used for exchange.
  • Both money and other commodities have their respective markets.
  • Both are demanded by people.
  • The prices of both are determined by the forces of demand and supply.
  • They are all regarded as commodities.

Differences

  • Money is generally acceptable while other commodities are not.
  • Money is portable while some of the other commodities may be bulky.
  • Money is relatively scarce while other commodities are available.
  • Money is homogeneous while other commodities are heterogeneous (difference in colour, shapes and sizes).
  • Money is durable while some other commodities are perishable e. g. fresh tomato.
  • Money is stable while other commodities are not.
  • Money is divisible into small units while other commodities are not.
  • Money has no intrinsic value but other commodities have.
  • Money can function as a standard of deferred payment while other commodities require immediate payment.
  • Money serves as a unit of account, other commodities cannot.

Test and Exercise

  1. ________ does not encourage a store of wealth

a) Money b) Goods c) Trade by Barter d) Production.

2. Trade by Barter requires ________ payment

a) Immediate b) Future c) Late d) Past.

3. In trade by barter, _______ is evident.

a) Lightness b) Bulkiness c) Sweetness d) Relativeness.

4. Commodities used in trade by barter are _____

a) Stable b) Divisible c) Unstable d) Portable.

5. _____ has no value.

a) Money b) Goods c) Services d) Trade by Barter.

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