Barter and Functions of Money

If an economy did not use money, what would it look like? Without money, the buyers would exchange goods with the sellers by exchanging one good for another good, which we call barter. Unfortunately, barter has many problems. Problem 1: Barter suffers from a double coincidence of wants. For example, if you produce shoes and want to drink a Coca-Cola, then you search for a person who produces Cola and needs shoes.

Thus, you need to search for a person who wants the opposite of you, which could take a long time. Problem 2: Many goods, like fruits and vegetables, deteriorate and rot over time. Growers of perishable goods could not store their purchasing power. They would need to exchange their products for goods that would not perish quickly if they want to save.

Problem 3: Products and services do not have a common measurement for prices. For instance, if a store stocked 1,000 products and money circulated with this economy, subsequently, this store would have 1,000 price tags. Then customers can compare products easily. With barter and no money, this same store would have 499,500 price exchange ratios as calculated in Equation 1. Variable E indicates the number of price ratios while n is the number of products produced in a barter system. :

Business people would have trouble writing contracts for future payments of goods and services under a barter system. Consequently, a barter society would produce a limited number of goods and services. Money eliminates many problems with barter and has four functions. First function of money is a medium of exchange because people use money to pay for goods and services and repay debts.

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Medium of exchange function promotes efficiency and specialization. For example, the author teaches economics. Under a barter system, the author would search a market extensively to find a person who would exchange goods and services that the author needs

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