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(a) Limited requirements

Barter system refers to the system where goods are exchanged for goods without the use of money. 

Difficulties of barter system:

(a) Problem of double coincidence of wants: Lack of double coincidence of wants means when two persons may not desire to purchase each other’s goods. For example Mr. A has wheat and wants salt. So Mr. A has to search for Mr. B who wants wheat and has salt, otherwise, the exchange would not be possible.

(b) Lack of common measure of value: In olden times there was no common unit in terms of which the value of goods could be measured. 

(c) Indivisibility of certain goods: There was a problem of exchange when a person had large commodities which could not be divided into smaller units Eg. 1 goat = 20 kg rice. If a person wanted 5 kg of rice, the goat could not be cut and exchanged.

(d) Difficulty in the storage of goods: It was necessary to store goods for future use but as most of the things were perishable, it was difficult to store. 

(e) Problem of making deferred payments: It means a payment to be made in the future. For E.g. taking a loan and making a payment in the future was not possible in the barter system. So, to overcome these difficulties of the barter system, people invented some other kind of money.

Double coincidence of wants means the meeting of two persons who agree to exchange one-another’s products.

There are commodities which cannot be divided. These are those products or goods whose value becomes nil or zero after division. 

For example: buffalo, cow, goat, etc. It is very difficult to perform exchange with such commodities.

Money acts as a medium for the sale and purchase of goods and services. It means, we can sell and purchase anything with the help of money because it is universally acceptable.

Correct answer is (b) No

Correct answer is (b) Seligman

Correct Option (2) a, b, c

(a) Primary function

Correct Option (3) a, b, d

Correct Option (4) b, c, d

Correct Option (1) a, c, d

No, I do not agree with the statement. A barter system is a process of exchange under which people exchange goods and services produced by them with goods and services produced by others. With the progress of civilization, human wants to be multiplied and the barter system of exchange became obsolete. This was because of various inherent limitations. 

They are as follows:

• Lack of double coincidence of wants: Barter exchange cannot take place unless there is a double coincidence of wants. Under Barter System wants may not always coincide. 
• Lack of common measure of value: In the Barter System, there was no common measuring unit of account, so it was difficult to calculate the value of goods to be exchanged. 
• The problem of storage: There was the problem of storage under Barter exchange because most of the commodities exchanged were agricultural in nature. Such as rice, wheat, etc. which were perishable. 
• The problem of divisibility: There was the problem of divisibility when it was a bulky commodity. E.g. exchange of rice and wheat with the horse was difficult.
• The problem of making deferred payments: Future payment was not possible in the Barter exchange. Borrowing and lending were difficult.

Following are the important things needed for exchange in barter system :

1. There must be at least two parties present.
2. Each party must have such commodities in excess that is needed by one-another.
3. Both parties must agree to exchange of goods.

Functions of money are placed in four categories :

(i) Primary Functions – The two primary functions of money are as under. These functions are necessarily done by money in all kinds of economies.

(a) Medium of Exchange – This is an important function of money, which is also its identity. All types of exchange take place through currency as the quality of acceptability exists in money. Manufacturers, sellers, receive money as value for their products, and the buyer pays for the value of goods/services purchased by means of money.

(b) Measure of Value – This is another important function of money. Determination of price of all commodities and services is done only through money. Exchange of goods and services becomes easy if their value is measured in terms of money.

(ii) Secondary or Subsidiary Functions : These are those functions that money performs to help execute its primary functions : Following are the functions :

(a) Basis of Deferred Payment – Money has made it much easier to make payments in future, since, the value of money does not fluctuate much. In present time, most commercial exchanges are based on credit. Loaned amount can easily be recovered in future by means of money.

(b) Means of Store of Value – It was not possible to store value in barter system as commodities had low shelf-life, but the circulation of money has made this work very easy. Money has stability, thus storage of value can easily be done by means of money.

(c) Transfer of Purchasing Power – Purchasing power can easily be transferred from one place to another, or from one person to another by means of money. This also does not entail any financial loss. For example, if a person wants to settle in Jaipur after leaving Bharatpur, he can easily sell his property in Bharatpur, receive the money and use it to buy property in Jaipur. This makes wealth mobile.

(iii) Contingent Functions of Money – Money also performs some contingent functions which make money more convenient and useful. These functions are as follows :

(a) Distribution of Social Income – Money makes the equitable distribution of social income easier. Presently, large scale of production is done, in which various means of production contribute greatly. Distribution of income generated by production, between different means is possible through the use of money.

(b) Basis of Credit – Money is the basis of credit. Today, banking institutions provide various kinds loans on a large scale and provide use of credit letters. This has become possible only due to money.

(c) Liquidity of Wealth – Money lends liquidity to capital and wealth. In liquid form, money can be used immediately for any purpose.

(iv) Other Functions of Money – Apart from the above mentioned functions, money also performs certain other important functions. These are :

(a) Basis of Solvency – Availability of money is an indicator of a person’s capacity of clearance of payments. This is an estimation of that person’s ability to repay loans. The more money a person has, the greater is his capacity to pay loans.

(b) Money acts as a bearer of Options – Money allows a person to make decisions regarding investment of his wealth in various works. It helps people to take financial decisions.

Meaning of Barter System – A system in which goods and services are directly exchanged for other goods without the use of money is called barter system. In other words, it is the direct exchange of goods produced by one person in return for goods produced by another person. By doing this, both persons obtain the more essential thing in exchange. According to Prof. Jevens “Exchange of more necessary commodity in return for a relatively less necessary commodity, is barter system”.
Example – Cloth is exchange for milk, and milk is exchanged for cloth, etc. This is known as barter system.

Disadvantages of barter system – Barter system played a very important role in initial stages of human development, and made the obtaining of various necessary commodities in society easy, but as human needs grew rapidly, many difficulties arose in this system, which are given below :

(i) Problem of Double Coincidence of Wants – Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person’s want to buy and sell. This coincidence is difficult. If a farmer wants grams in exchange of surplus wheat, then he will have to find such a person who has surplus of grams and who wants to exchange it for wheat. This coincidence is very difficult in practical life, and unless it is found, barter cannot take place for a less necessary thing.

(ii) Difficulty in Value Measurement – There was no universally accepted value standard measure in barter system, because of which price had to be determined for each new exchange deal – how much milk to accept in exchange for how much wheat, or how much grams to take for how much wheat, and it was difficult for both parties to agree on these prices. Due to lack of agreement, exchange was not possible. Because of this, barter system became a very complicated process.

(iii) Difficulty in storage of value – Every person wants to keep aside a part of his income as savings to secure his future, but this was difficult and risky to do in barter system, since most commodities were perishable and they could spoil or easily be stolen. In addition, storage required large space. Especially milk, fruits, vegetables, etc. food items could not be stored for a long time. Therefore, future storage of excess products was not possible in this system.

(iv) Problem of Divisibility – Some commodities are such that they cannot be divided. If at all they are divided, their utility becomes zero.

This problems arises also when buying an expensive thing in return of a cheap commodity. For example, if a person has a horse and wants to obtain wheat, rice, cloth, etc. It is difficult to find all these three things with one person. If these things have to be obtained from three separate persons, how would the horse be divided. In addition, it is also not necessary that these people would be agreeable to accept the horse. This was a great problem in- barter system.

(v) Problem of Difficulty in deferred payment – In barter exchange, credit transactions were very difficult because it was not possible to calculate the future prices of the commodity. Without credit transactions, trade does not develop, and no economic progress happens in the society.

(vi) Difficulty in Transfer of Value – One of the difficulties that existed in the barter system, was to transfer value from one place to another. Example – If a person wants to relocate himself from Kota to Ajmer, then the price of house received in form of goods would be very difficult to carry to Ajmer.

Mohan produces wheat and he has more wheat than he needs. Similarly, Sohan produces cloth and he has more cloth than he needs for himself, then when the need arises, both persons can exchange wheat and cloth and fulfil their individual needs, i.e. Mohan will buy cloth by selling wheat and Sohan will buy wheat by selling cloth. This is what barter system means.

M₂ = M₁ + Post Office deposits and deposits in saving accounts in banks.

Money is a commodity in terms of which value of all goods and services are measured. Thus, money helps the consumers to take financial decisions. 

For example : which good should he purchase, and which good he/she shouldn’t purchase.

Two problems of barter or exchange system are :

1. Problem of double coincidence of wants
2. Problem in measuring value of a commodity.

General acceptability.

Bank money refers to demand deposits created by the commercial bank.

Demand deposits are the deposits, which can be encashed by issuing cheques.

Demand deposits are those deposits which have to be returned if demanded by depositors.

(d) Credit card

(d)  Pay tax

Introduction of money removed difficulties of barter.

Explanation: Barter system had many difficulties like the problem of double co-incidence, common measure of value, the problem of standard method of deferred payment etc. which were solved by the introduction of money. Money has overcome the drawbacks of the barter system and serves as an effective medium of exchange to facilitate trade.

The most liquid asset is money.

Explanation:

Money is the most liquid asset. Gold, silver, land, cheques etc. are not as liquid as money. If the need arises, these assets have to be converted into money, but money need not to be converted into any other form as it is readily acceptable.

In case of token coins, intrinsic value is less than their face value.

Explanation:

Intrinsic value of token coins refers to the value of the metal which a token coin is made of. On the other hand, face value is the value which is mentioned on the coin. Since token coins are made up of cheap metals, in case of token coins, the intrinsic value is less than their face value

Medium of exchange is primary function of money.

Explanation:

The main function of money is to act as a medium of exchange. It facilitates exchange through a common medium i.e. facilitates exchange through currency and eliminates the need for double coincidence of wants for an exchange to take place. Therefore, it can be concluded that medium of exchange is the primary function of money.

Cheque is the Bank Money

In the initial stage of development, commodity money was used.

Explanation:

Initially, human beings exchanged goods and services for other goods and services. In other words, commodity exchange or commodity money was more prevalent. Commodities like sea-shells, salt, gold or other precious commodities were used as money for the exchange of goods and services.

(d) All the above

(c) Both a & b

Explanations:

1. Anything which can be used as money or equivalent to money is called near money. Since bills of exchange can be used in the exchange of goods and services and can be converted into money at any point of time, they are an example of near money.

2. Standard of deferred payment is the secondary function of money. Standard of deferred payments means that money can be used to make future payments. This implies that wealth in the form of money can be stored easily as a medium of exchange for future use.

3. Sea shells are an example of commodity money as, in the initial stages of development, commodities like sea-shells, salt, gold or other precious commodities were used as money for the exchange of goods and services

4. Double coincidence of wants is one of the drawback of barter system. It implies that the needs of any two individuals should complement each other for the exchange to take place. However, in reality, it is very difficult to find an individual who possess the goods and services that are needed by another individual at the same time to exchange what he/she has.

5. The currency issued by the monetary authority is known as legal tender money. It implies that the values of such currency notes and coins are backed by the monetary authority. Fiat money becomes the legal tender when it is backed by the monetary authority

British introduced the paper money

The above statement is false. Metallic coins are not easily portable because large amounts of metallic coins are difficult and inconvenient to carry and transport from one place to other. On the other hand, paper notes are easily portable as these notes are light weighted and possess high face value. Hence, it is can be said that paper notes are more easily portable than metallic coins.

(b) Gold smiths

The commercial banks create credit in the economy through deposits. Money facilitates the functioning of credit instruments such as cheques, promissory notes, bills of exchange, etc. Such credit instruments facilitate transfer of value from one person to another. In this way. money forms the basis of credit.

The secondary functions of money are as follows:

i. Standard of deferred payments: Payments can be easily made through the medium of money. In other words, it is very difficult to pay back a loan in terms of goods and services. However, with the advent of money, the payment of loans or interests can be made easily.

ii. Store of value: Store of value function of money implies that money can be easily stored in the form of wealth and can be stored used as medium of exchange in future.

iii. Transfer of value: Money can be transferred easily from one place to another and from one person to another. Therefore, with the help of money, purchasing power can be transferred.

Any commodity chosen to serve as money is called commodity money. For example - if a person having surplus wheat wants milk, he/she can exchange wheat with a person who has milk and who needs wheat at the same time. Thus, from the example it can be inferred that wheat and milk are commodity money

Wrong Pair: 

Electronic money – Gold coins