Money and its Role

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Barter system means exchange of one kind of goods and services for another kind of goods and services. No money is involved in this system.

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The need for money arose because the barter system had many problems. It was difficult to find people who wanted exactly what another person had, and many goods could not be divided, stored, or measur…

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Double coincidence of wants means that if one person wants to exchange a good, the other person must also want to exchange his good with the first person. Without this matching need, barter fails.

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Some goods cannot be divided into small parts without losing their usefulness. A cow cannot be divided into several pieces, so it cannot be easily exchanged for many different goods in barter.

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In barter, it is difficult to compare the value of different goods because there is no common measure of value. A cow can never become a common measure of value, so exchange ratios become confusing an…

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Many goods are bulky or perishable. A farmer who has wheat may need to store a large volume of it to exchange later for furniture, cloth, and other goods. This is difficult and inconvenient.

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Perishable goods lose quality and value after some time. Because of this, they cannot be safely stored as a store of value or used for lending and borrowing in the future.

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Money is something that is generally accepted by society as a medium of exchange and can also act as a unit of account, store value, and be used for repayment of debt.