Q1. What is barter system? Discuss its difficulties.

Barter System:

The direct exchange of surplus goods for another goods or services with another person without
the use of money is termed as Barter System in economics.

Although Barter still exists in economically backward and underdeveloped areas of the world, like in
villages of Pakistan barter system is still in practice to some extent. But in advanced and developed
countries, this system has given up due to its inconvenience and difficulties.

Difficulties of Barter System:

Some of the difficulties which have been faced up in barter system are as below:
1. Lack of double coincidence of wants
This is the most basic problem in barter system. It means that there must be double satisfaction of
wants by both parties willing to exchange for goods and services.
For instance, goods or services can be exchange effectively if a person is able to offer what the
other person wants and at the same time needs exactly what the other can offer.
2. Lack of common measure
In barter system, there is no common measurement for exchangeable goods. For instance, if a
person have cow and other have goat, and 1st want to exchange cow after receiving two goats,
and other is not agree from 1st because there is no common measurement of goods.
3. Lack of sub-division
As there are some commodities which cannot be sub divided. Like a person have a horse and other
want to exchange 20 Kg Rice. So, in this situation which part of horse should be given in exchange
for 20 Kgs of Rice?
4. Lack of store value
In barter system there is no facility of store value. Because there were some goods that have no
storage facility. Like vegetables, fruits, and other perishable goods, etc.
5. Specialization not possible
Under the barter system each person is a jack of all trades and master of none. A high degree of
specialization cannot be achieved under barter system.
6. Difficulty in future payment
It is very inconvenient to lend goods to other people, due to the lapse of time the value of goods
may fall. So, it becomes difficult to make payments in the future.

7. Difficulties in transfer of wealth

There is great difficulty in transferring wealth from one place to another under barter. More ever
immovable property cannot be transferred.
8. Difficulties in tax collection
In barter system, if tax is collected by government in the form commodities then the goods
collected from taxpayers will be difficult to store for a longer period. Moreover, they will lose their
value with the passage of time.

Q2. What is the best definition of money? Support with reasons.

Money is one of the wonderful inventions of man. Money has no precise definition; it has been
defined differently by different economists. These definitions of money are usually classified into
three groups as below:

1. Descriptive Definitions:
Crowther in his book defines “money is anything that is generally acceptable as a mean of
exchange and at the same time acts as a measure and store of value.”

According to Cole, “money is anything that is widely use as mean of payments and is generally
acceptable in settlement of debts.”

2. Legal Definitions:
According to Professor Knap, “anything which is declared by the state as money is money.”

According to Professor Hartley, “money should be a legal tender.”

3. General Acceptability Definitions:

According to Kents, “money is anything which is commonly used and generally accepted as a
medium of exchange or a standard of value.”

The definition of money which is generally accepted is defined as under:

“Money is anything that is regularly used in economics transactions and serve as a

medium of exchange, a unit of account and a store of value.”

Best Definition of Money with Reason:

The main defect with description definitions is that they do not define money but only describe
what the money is. Therefore, these are considered as partial and narrow definitions of money.
Furthermore, the legal definitions of money are also considered as narrow because the government
cannot force the people to accept anything as money. For example, in Germany in year 1923, ‘Mark’
was declared by the government as a money, but it wasn’t accepted by people as money even they
were threatened with death penalties. Therefore, from above discussions now it is very clear that
general acceptability principle along with legal supports are essential for anything to serve and
accepted as a “Money”.

Q3. What are the functions of Money?

Functions of Money:
The functions of money can be categorized as per below:

A – Primary Functions of Money:

1. Money as a medium of exchange

2. Money as a unit of account

3. Money as a standard of future payment

4. Money as store value

B – Secondary Functions of Money:

1. Aid to specialization, production and trade

2. Influence on income and consumption

3. Money is an instrument of making loans.

4. Money is a tool of monetary management

5. It is an instrument of economic policy

C – Contingent Functions of Money:

1. Distribution of national income

2. Base of a credit system

3. Tax collection is possible

Q4. Define evolution of Money?

Evolution of Money:
In the earliest stage of human civilization, there was no concept of money. The families or group of
people were almost self-consumer of all goods they produced. With the passage of time, a need
was felt to exchange goods directly for goods possessed by other persons. For this, a system was
developed call “Barter System”. So, the earliest money which came into use for exchange of goods
and services was “Commodity Money”. As society developed, many other forms of money have
evolved through the following three main stages.

1. Metallic Money

2. Paper Money

3. Bank Money

1. Metallic Money:
Metallic money consists of coins made of gold, silver, copper or nickel. There are following form of
metallic money:

A) Standard Money: It represents the money of account which means the monetary unit, in term of
which, the prices, debts and other transactions are expressed.

B) Token Money: It is a subsidiary money, its face (the value printed on it) is higher than its
intrinsic value (the value of metallic contents).

C) Limited and unlimited tender: Unlimited legal tender money is one in terms of which debt can be
legally paid up of any amount. In Pakistan, for instance bank notes of Rs. 10, Rs. 50, Rs. 100 are
unlimited legal tender money. Whereas, limited legal tender money is that which a creditor can only
accept in settlement of certain limit only. In Pakistan, for instance the creditor can refuse to accept
payment of legal obligations if they are paid in small coins of Rs. 1, 2, etc.

2. Paper Money:
Paper money is referred to the notes issued by the state bank or government. They have following
forms:

A) Representative Money: It is money which is fully backed up by equivalent metallic reserve such
as gold or silver.

B) Convertible Paper Money: Paper money which is convertible into coins on demand is called
convertible paper money.

C) Fiat Paper Money: It is money which is not backed up by any equivalent metallic reserve.

3. Bank Money:
Bank money refers to that money which is not legal tender but is accepted as medium of exchange
on account of confidence on the issuing authority. It consists of following:

A) Cheque

B) Bill of Exchange

C) Draft

D) Pay order

Q5. What is meant by coinage of money in economics? Briefly

discuss various types of coinage.

Coinage of Money:
Coinage of Money is the process of manufacturing metals into certain shapes so that uniformity in
weight and size is maintained in all the coins of the same kind. Before the advent of coinage, the
metals like gold and silver were used as a medium of exchange in a very crude form such as they
were cut into small pieces or shapes for comparing and storing of values. With the passage of time,
metals were started to convert into standard coins of specified shapes and weight such as gold and
silver coins.
In the modern times, the sole power of coinage money has taken by the state government.
Standardize coinage has the following advantages:

It has become a convenient commodity as a medium of exchange and comparing of values.

The stamped coins have become historical documents of the state.
By stamping and standardizing metal coins chances of tampering with metallic money has been
reduced significantly.

Types of Coinage:
The main types of coinage are:
1. Free and limited coinage
2. Gratuitous coinage and non-gratuitous
3. The debasement of coins

1. Free and limited coinage

(A) Free Coinage:

Coinage is said to be free if people can take metals to mints for being converted into standard coins
with limit.

(B) Limited Coinage:

Coinage is said to be limited when metals is converted into standard coins with the permission of
the state or government.

2. Gratuitous coinage and non-gratuitous

(A) Gratuitous Coinage:

In the currency system of free coinage, if the government doesn’t charge any fee for
minting/converting coins, the coinage is said to be gratuitous.

(B) Non-Gratuitous Coinage:

Coinage is said to be non-gratuitous, when the government charges fee for converting/minting
metal into coins.

3. Debasement of Coins:
When there is difference of between a standard value of precious metals fixed by law and the real
value of the metal used as a coin, it is then a case of debasement.