Question

Define exchange and transaction costs in the context of a barter vs. money based economy?

As an economy grows in complexity, which one of those costs works in favor of using money? Why?

As an economy grows in complexity, which one of those costs works against using money? Why?

Based on your answers to the above, explain why we often see governments enter into the business of minting their own coin over the history of the emergence of money?

Answer 1

Barter system means exchanging goods for goods. If we want rice we have to give some other commodity to others like wheat,milk or any other commodity. In this system we didn't calculate value of the commodity instead we exchanged goods for goods.This system had a lot of limitations like value didn't calculate, other person's need had to be considered etc.

In order to solve this issue we followed money based economy. At present we are following this method. Here we can calculate the value of the commodity in terms of money. We can purchase goods and service at anytime by paying the amount. It has alot positive side. But it has some limitations like expenses to printing the money, Others have to accept as a medium of exchange and have to keep the value of money etc.