5.

Limitations of Barter Exchange

The major limitations ot Barter ixchange are:
1. Lakot Double Coincdene of
WantBarter system can work only when ke
and seller are ready toexchange each others goods, For example, A
with Bonly when Ahas what Bwants and Bhas what A wants. can
coincidene is very rare. Howeverexchange
, such douhi
2. Lakot Common Measure of Valufnthe barter system, all
value and there is no conmmon measure (unit) of value of g00ds
and services, in
comnodities
are not of en
exchange ratios can be expressed. l'or example, if Ahas wheat and | Bhas which
diicult to decide, how much wheat is needed to exchange with one rice, then it
the absence of connnon measure, the exchange ratio is fixed kilogram of tio t
randomly, in which one a
the party generally suffers.
Bartersystem can work with few commodities in the primitive society. However, it is very
modern economy, where we need millions of exchange ratios for a large number of goods
diffcultin be
and servie,
3. Lack ot Standard ot Deferred Payment: Under barter
payments or credit transactions cannot take place with system,ontracts involving future
ease beause of following reasonk
(a The borrower may not be able to arrange goods of exactly
same quality at the time
of repayment.
(by There may be conflicts regarding which specific commodity is to be used or
repayment.
(cAhe commodity, to be repaid, may loSe or gain its value at the time of repayment
So, it is very difficult tomake deferred payments in the form of goods.
4. Lack of Store of Value:Under barter system, it is difficult for people to store wealm
future use because:
(a) Most of the g0ods (like wheat, rice, vegetables, etc.) do not Possess durability, ie
their quality deteriorates with passage of time.
(b) Storage of goods requires time and efforts.
As a result,goods cannot be used to store the earnings for a long
period. result,il
With so many difficulties, barter exchange could not continue for a long time. As a'Money
was replaced by monetary exchange, i.e. buying and selling of goods withthehelp of
ofmoney
Money has been defined differently by different economists.The mosttacceptable definitiond money
can be functionsof
stated in terms of allthefunctions of money. So, let us first discuss the main f

5.3 FUNCTIONS OF MONEY

The functions of money can be broadly categorised under two heads:
1. Primary Functions (Main or Basic Functions)
2. Secondary Functions (Subsidiaryor Derivative Functions)
 5.3
Chapter5 Money

FUNCTIONS OF MONEY

Primary Functions Secondary Functions

Standard of
Measure of Value Store of Value
Medium of Exchange Deferred Payments

Primary Functions
Primary functions include the most important functions of money, which it must performn in
ererv country. These are:
) Medium of Exchange
Money, as a medium of exchange, means that it can be used to make payments for all transactions of
os and services. It is the most essential function of money. Money has the quality of general
caeptability. So, all exchanges take place in terms of money.
Sunchon has removed the major difficulty of lack of double coincidence of wants and
nconveniences associated with the barter system.
Xe of money allows purchase and sale to be conducted independently of one another.
sfunction of money facilitates trade and helps in conducting transactions in an economy.
Money has no power to satisfy human wants, but it commands power to purchase those
things, which have utility to satisfy human wants.
for,"How does money / separate the acts of sale and purchase", refer HOTS.
)
Meas
Money as ure
a
of Value
measure (Unit
of value of Value)
means that m
money vorks as a common denomination, in which values of
al
yoods and
By reducingservicthees value
are expressed.
becomes very
casy to find out all goods and services to asingle unit (i.e. price), it
of
This function fa the exchange ratios between them and comparing their prices. be otherwise
facilitates maintenance would
of business accounts, which
ITMonenposysibhelle. ps in calculating relative prices of goods and services. Due to this reason, it is
regarded as aUnit of Account'. For instance, Rupee() is the unit of account in India,
'ound (£y Yin England and sO on.
tTohendarse refery Functthoseions
\incionS are deriyedfunctfrioomns profimary Tunctions and,therefore, they are also known as Derivative
to
money which are supplementary to the prinary
functions. These

Iunctions.
 5.4

The major secondary functions are:

introductory MacrOeConomi.
(i) Standard of Deferred Payments
Money as astandard of deferred payments means that money acts as a'standard' for
are to be made in future. Every day, millions of transactions take place in which payments, uhiard
not made immediately. Money encourages Such transactions and helps in capitalpayments
formation
and economic development oftheeconomy.
This function of money is signifcant because:
Money as a standard of deferred payments has simplified the borrowing and len.
operations.
" It has led to the creation of financial institutions.
(ii) Store of Value (Asset Functionof Money)
Money as a store of value means that money can be used to transfer purchasing power from presat
tofuture. Money is a way to store wealth. Although wealth can be stored in other forms als,
but money is the most economical and convenient way. It provides security to individuals to
meet contingencies, unpredictable emergencies and to pay future debts. Under barter systm,
it was difficult to use goods as a store of wealth due to perishable nature of some goods and
high cost of storage.
Money as store of value has the following advantages:
Money is available in fractional denomination, ranging from 1 to 2,000. does
as its storage
Money is easily portable. So, it is easy and economical to store money
not requiremuch space. gOods at
Money has the merit of general acceptability. So, it can be easily exchanged tor
all times.
Savings in terms of money are much more secured than in terms of goods.

One More Secondary Functionof Money

transferringthe
mean
anybodycansell
Money also perfornm the function of Transfer of Value'. By'transfer of value, we function
value of durable and immovable goods from one place to another. Through money, This
his immovable property at any particular place and buy a property at Some other place.
provides mobility to machinery, land and goods.
For"Contingent, Staticand Dynamic Functions of Money", refer Power Booster.
Moneyhas
Money has overcome the drawbacks of Barter System inefficient. M
Barter system makes the exchange process very difficult and highly ditticulty
overcome the drawbacks of barter system in the following manner: r of
acts sle
major
removedthe maximun
1 Medium of Exchange: As a medium of exchange, money hasS Separates the
of lack of double coincidence of wants in barter system. It obtainingfor momey
in
and purchase of goods and services and helps both the parties
'cansell
goods
satisfaction. Abuyer can buy goodsthrough money and aseller