Theory question 106
Money and Inflation(a) What is commodity money?
(b) Identify any three problems associated with trade by barter.
(c) Explain any three ways by which the advent of money has solved the problems of the barter system.
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(a) Commodity money is a good that has value in itself and is generally accepted as a medium of exchange, e.g. cowries, salt, cattle, gold.
(b) Any three: double coincidence of wants; lack of a common measure of value; indivisibility of goods; difficulty of storing wealth; no standard of deferred payment; difficulty of transporting goods.
(c) Any three: as a medium of exchange it removes the need for double coincidence of wants; as a unit of account it gives a common measure of value; it is divisible into small units; as a store of value it allows wealth to be saved; as a standard of deferred payment it makes borrowing and credit possible; it is portable.
Match each barter problem with the function of money that solves it.