Economics: Money and Its Role: Introduction and Barter System

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Introduction

Money serves as a medium of exchange, as a store of value, and as a unit of account. Money is needed to satisfy our various wants. Now-a-days money has occupied a very important role.

Barter System

  • Barter system means exchange of one kind of goods and services for another kind of goods and services. There was no involvement of money in barter system. When one good is exchanged for another good without use of money, we call it trade through barter system. This was happening in ancient civilizations. Example of barter system is when a farmer wants a shoe he may go to cobbler and in return of shoes he may offer him a food grains.

  • Barter system cannot be used in present world because of some demerits of it which are as follows:

Lack of Double Coincidence of Wants

The functioning of the barter system requires a double coincidence of wants on the part of those who want to exchange goods or services. It is necessary for a person who wishes to trade his good or service to find some other person who is not only willing to buy his goods or service, but also possesses that good which the former want.

Lack of Division of Goods

Certain goods are not physically divisible into small pieces. Such as a cow cannot be divided into many pieces to purchase different small commodities.

Lack of Common Unit of Measurement

Under barter system, it was difficult to equate the values of different goods which were traded because of lack of common unit of measurement.

Stock for Fulfilling Future Needs

Every time when one wants to purchase some goods the former should have the commodity available with him to offer in return. So, it becomes necessary to keep the stock of our own commodity to fulfill future needs by exchanging in return.

Loses Its Original Quality and Value

Finally, a major problem of barter system is that, a good loses its original quality and value if it is stored for a long period.

Definition and Functions of Money

Money is defined as something which is generally accepted by the society as a medium of exchange and which can act as unit of account, can store value and be used for repayment of debt. The functions of money can be known from its definition. They are given below.

Medium of Exchange

Money is as a medium of exchange while buying or selling a product in the market.

Measure of Value

Money gives a common measure of value of a commodity in the form of a price which is measured in monetary terms.

Store of Value

Some commodities which are perishable in nature cannot be stored for a longer period of time, but money can be stored as it don’t lose its value over a long period of time.

Making Payments in Future

We all indulge in lending and borrowing activities. If one lends some money amount to his friend who is in need then his friend can return the same amount with interest after some time in future.

Types of Money

Normally there are two main types of money i.e., Paper notes and coins which are normally used for trading.

Types of Money

Types of Money

Paper Notes

In India, we have paper notes in the denomination of 1,2, 5, 10, 20, 50, 100, 500 and 1000. Normally they are called currency notes and named as Rupee (Singular) or Rupees (Plural).

Coins

A coin is a small, flat, round piece of metal used primarily as a medium of exchange. In India for smaller denominations, we have coins called “Paisa”, such as 50 paisa where 50 paisa is equal to half of one rupee.

Currency notes and coins of India are valid only in India and not in other countries. Every country has its own currency. The name of the currency of some of the countries of the world is given bellow.

  • Currency in USA in called dollar with symbol $.

  • The European currency is called euro having symbol €.

  • Currency in United Kingdom is called pound having symbol £.

  • In Japan, the currency is called Yen having symbol Ұ.

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