Submitted by:

Name IZNA
Registration
# 2019-BCOM-009
Semester BS Commerce (II)

Teacher Information
Name Ms Nadia Jamil
Course Fundamentals of Money and Banking

Assignment Information
Title Barter System
Date Due 17April,2020
Assigned Question: 1- List the financial transactions you have made last week.

How each have been carried out 50 years ago?

2- Under what circumstances might it expect barter to
remerge

in economy that has fiat money as a means of payment?

3- Explain how money encourages specialization, and

How specialization improves everyone standard of living?

4- Explain why these commodities cannot serve as

Money?

1 tomatoes 2 bricks 3 cattle

 Work Completed
Q#1 List the financial transactions you have made last week.
How each have been carried out 50 years ago?
As we are living in modern era, where we have a common unit of account for our
transactions that is money, whether it is paper money, credit money, near money or
digital money e.g. bitcoins. We live in a world where physical market transactions
are decreasing day to day no doubt many under develop countries and their far
areas still use some old methods of transactions but in develop economies and most
developing economies these transactions are carried on online systems. In next 7 to
12 years we can see world completely shifting on digital money and online system,
in present era too people feel comfortable to use bank cards instead of keeping
paper money. In last week I made some transactions, in that some are online too.
Below given the summary of my some transactions:-

Product Price Source

Rice 510 Physical market
Wheat 880 Physical market
Pulses 700 Physical market
Salt 100 Physical market
Apples 300 Physical market
Potatoes 250 Physical market
Almonds 300 Punjab cash and carry ( online )
Cookies 320 Punjab cash and carry ( online)
Hair Clips 290 Daraz.pk app ( online)
PTCL bill 3960 PTCL app ( online)

I go to physical market, bought the rice, wheat, pulses and salt by my bank card
and then the apples and potatoes by paper money. I paid my online transactions
through by bank as many banks provide online services to their customers across
the world.
50 Years ago:-
Now what if I have time machine and I go 50 years back where
economy is just establishing and the concept of paper money, legal tender money
or fiat money is just new. People in backward areas of underdeveloped, developing
and some areas of developed countries use barter system for their transactions. I
will carry each of the transaction in barter economy. As if I do not have money but
have some commodity let’s just supposed its wheat and I want rice in exchange of
it. So in order to get rice I have to find a person who wants to exchange it with my
commodity e.g. wheat. In this case the major difficulty I face is the not having
double coincident of wants which is the second person do not want to exchange its
rice with my wheat he needs sugar in return of his rice. So I have to find a person
who have sugar and wants to exchange it with wheat and then I first exchange
wheat with sugar and then sugar with rice. It’s just a very simple example but in
real I have to go through many transactions to get my desired commodity. In order
to do so I also have to look the value for other commodities. As in barter system
due to lack of common unit of account, value of goods measured in relative
terms, i.e. value of one good in terms of other goods. So I have to look:

Value of wheat in terms of rice

Value of wheat in terms of potatoes
Value of wheat in terms of pulses
Value of wheat in terms of apples
Value of wheat in terms of almonds
Value of wheat in terms of cookies
Value of rice in terms of potatoes
Value of ice in terms of pulses and so on
I have to look each commodity value in terms of all other commodities and this
will make a long chain of transactions. For measuring the exchange rate of
commodities there is following formula that is used:

n (n-1)/2 ( n= number of goods)

in my case I will not consider PTCL bill as this service wasn’t available and hair
clips is another type of commodity which can be exchanged in return of similar
commodities like dresses or something else. Considering only edible I have
following transactions to go through:-

8 (8-1)/2 = 28

I have to through 28 transactions for just 8 commodities that is very difficult.

Q#2 Under what circumstances might it expect barter to remerge? In
economy that has fiat money as a means of payment?

.
Barter System: It is Fiat Money: any money
declare by government as
a system where goods
legal tender money. It
and services are
cannot be converted into
exchange in return of
coins as unlike other money
goods and services.
it is not backed by gold or
E.g. exchange of wheat
silver. Dollar is the best
with rice.
example of it

Remerge of Barter System:-

In the backward areas of many countries like India, North Africa and many other
barter is still prevailing due to low purchasing power of people. For example as we
barter a bag of chips with ice cream back in schools due to lack of purchasing
power. But its reemergence on a bigger level in economy can be due to high
inflation rates people lose their purchasing power and start bartering the goods and
services. For example in last days tomatoes’ prices in Pakistan are very high so the
people in villages and many small cities barter it with other valuable commodities
e.g. wheat.

Similarly, if the deflation rates rises and economy comes in the phase of
depression and economy collapses. As the fiat money is backed by government and
central bank so the government and central bank unable to back it people will not
trust this money as they cannot use this as store of value anymore so they move to
barter system.

In the above scenario, people will start making transactions with their own assets.
For example a real estate person will exchange its some property with farmers in
exchange of edibles like wheat, tomatoes, potatoes and other fruits and vegetables,
this real estate person will exchange this commodities further with restaurants to
get some food. These restaurants owners can further exchange their meal with
electrician for repairing the broken electricity wire of restaurant and the cycle goes
on.

Barter system in a very organized manner is remerge in corporate sector due to

difficulty in managing the cost of money due to expanding international trade.
Many countries in present era do barter for their national sake. For example:

Indonesia biggest producer of natural resources do barter for fighter jets with
Russia. China is also thinking to exchange it goods and services with oil in Iran.
Similarly many big business organizations do the barter for their goods and
services. Modern term use for barter is swapping.

Q#3 Explain how money encourages specialization, and how specialization

improves everyone standard of living?

If we do not have money in economy people have to use barter system in which
they face difficulties like double coincident of wants and many more problems. But
money have many characteristics that other systems lack. Like in form of money
we have a common unit of account, it have storage value. In this scenario, money
encourages specialization by decreasing exchange rate. Other ways in which
money can increase specialization is:

As basic objective of firms is to earn revenues, and revenues are in monetary

terms. So the try to make improved and high quality products in low cost. As the
costs are low people will get products in less prices and good quality. It also
develop a competition among firms to make good products at low costs. For
example McDonald and KFC biggest competitors in market continuously try to
make good innovative products with lower costs and healthy diet plans. They also
try to bring more innovation in products and with better products and services
people standard of living will improve.

Ultimately firm producing good products with good technology will get specialize
in that field and hire expert people services that will also increase production and
people will good products. For example packages ltd. a well-known company now
grow in size and it hire specialize people in organization and it is specialized in
making tissue, paper products and packaging material.
Similarly, when these organizations grow and move toward profit maximization as
well as wealth maximization they will hire more employs, unemployed people get
jobs and earn money and money itself is the source of improving standard of living
of people as now employed people will buy more products and make more deposits
this cycle moves faster and a prosper will come in economy.

Q#4 Explain why these commodities cannot serve as

Money?

1 tomatoes 2 bricks 3 cattle

Money:-

According to prof. Kent:

“Anything which is widely accepted as a medium of exchange and standard of

value is money.”

So these can only be used as money in barter system, but due to some demerits that
are given below commodity vise.

Tomatoes:-

Tomatoes is permissible commodity. It cannot be store for a long time. It cannot

be transported on long distances. It do not have such significance for people that
they use it as a means of exchange. Because in barter economy people look for
commodity that is valuable in the sense that people readily need that, that is not
perishable so can be store for a long time for future exchanges. That’s why they
cannot serve as money in barter economy.

Bricks:-

Bricks are very heavy and in particularly large in size. That’s why bricks also
cannot use as store of value. They are very heavy so they cannot transport from
one place to another. Also one cannot carry them along to exchange purpose due to
their weight.

Cattles:-
Cattles like division. Also we cannot predict their actual value. For example, one
kg of wheat is how much of a cattle, as a whole cattle cannot equal 1 kg of wheat.
They are living thing we cannot divide them into parts and exchange.

THE END