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Overview

Characteristics

Money has the following characteristics:

Durability and portability

To be acceptable from a day to day practical standpoint, money must be portable and durable.

Acceptability

Money is widely recognised and accepted as a medium of payment for goods and services.

Divisibility

As money is a measure of the value of goods and services, it must be divisible cattle and livestock do not make 'useful' money as they are not truly divisible

Scarcity

Money must be limited in supply in order for it to keep its value

The barter system

In the absence of money, people have to use a barter system in order to trade goods and services. Bartering is the act of swapping items in exchange for other items through a process of bargaining and negotiation.

For example, someone might trade five sacks of rice for one cow, or four chickens for a sheep.

Problems with a barter system:

The need for a double coincidence of wants

The person with chickens must find a trader who wants chickens in exchange for their sheep. As two people engaged in a trade must both want what the other person is offering, bartering is highly inefficient.

Divisibility

Half a sheep or two-thirds of a chicken is not very useful for traders.

Portability

Compare the portability of a sheep or fish with that of paper money (banknotes).

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Economics notes  on

Charactheristics of money and barter

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