ORIGIN OF MONEY

BARTER SYSTEM AND ITS PROBLEMS

INTRODUCTION
We are all familiar with money as we
live in a monetary economy where
money is used freely and widely in a
settlement of various economic
transactions. we will talk about why
money came into being.
And about barter system and its
problems.
 WHAT IS BARTER
SYSTEM?
• Before the 'advent of money, the activity of exchange was
carried out through barter system.
• Its is the oldest system of trading
• In barter system people exchange goods and services
between two parties without any involvement of cash
 WHAT PROBLEMS COULD
ARISE IN BARTER SYSTEM?
Analysis of barter economy reveals 4 aspects that are considered as
problem-
I) Lack of double coincidence of wants.
2) Problem of a common measurement of value.
3) Lack of divisibility of commodities
4) Difficulty in storage of wealth.
 1. LACK OF COINCIDENCE OF
WANTS
• Barter requires double coincidence of wants. Double coincidence of wants
means that both of the parties have to agree to sell and buy each commodity.
• Such coincidences were easy when human wants were simple and number of
goods produced were limited.
• But, as number of goods multiplied such coincidences of wants became
difficult and time consuming.
LACK OF DOUBLE COINCIDENCE OF
WANTS- EXAMPLE
I would love to
I will trade you
trade you a gallon
wheat for a gallon
of milk. But I
of milk.
already have plenty
of wheat.
 2. PROBLEM OF A COMMON
MEASUREMENT OF VALUE

•In barter, there is no common measure (unit) of

value.
•In barter system the value of every commodity
can be measured in terms of other commodities.
 PROBLEM OF A COMMON MEASUREMENT OF
VALUE- EXAMPLE

• For example, how much wheat or milk or salt or rice

needs to be offered in exchange for one meter of cloth ?
• If there were, say, 10 goods in a society, people were
required to determine and remember 45 values, while if
there were 100 goods there would be 4950 values.
 3. LACK OF DIVISIBILITY OF
COMMODITIES

•In barter system we cannot divide all the

commodities into small units.
•Many goods, if sub-divided will lose their
value partially or sometimes whole value.
 LACK OF DIVISIBILITY OF
COMMODITY- EXAMPLE
• a person who wants to exchange his car for
10 or 12 commodities, will find it difficult to
get all these 10 or 12 desired goods from one
person.
• Hence, he would need to sub-divide the car
into 10 or 12 parts.
• But by doing so car will lose its value.
 4. DIFFICULTY IN STORAGE OF
WEALTH
• It is very difficult to store wealth as many of the goods lack
durability and are perishable.
• They perish in short period of time.
• People could not think of storing wealth to provide for future in
the form of wheat, milk, etc.
• So it is not possible to store the goods in barter system for a long
time.
 REASON TO SWITCH TO
MONEY IN THE ECONOMY
• It solves the lack of double coincidence of wants by being a common
medium of exchange.
• Money is the common measurement of value.
• Money can be easily divided into smaller values, thus eliminating the
problem of divisibility of goods.
• Money is very durable and can be stored of future needs.
THANK
YOU!!