Tuesday, July 3, 2012

My chicken for your goat!

Good morning economists. Today we will discuss the reason for the existence of money. Money, or lack of it, to be exact, is the cause of the current recession. However, money is not actually necessary to complete a transaction.

Before money was created there was another system of transactions in place, barter. Barter is the exchange of goods and services for other goods and services. In the older days a farmer who wanted to exchange his chicken for a goat had to search, for a significant amount of time, to find another farmer who was willing to exchange his goat for a chicken.

Barter is more evident nowadays in transactions that require the exchange of large quantities of money. There are many real estate classifieds for example, where the seller would like to exchange her property with another.

The problem with barter and the motivation behind the creation of money, is that it requires a double coincidence of wants. Using the contemporary example described in the previous paragraph, a real estate property seller would require another property that is acceptable for her from the buyer. So both the buyer and the seller need to agree on the properties that will be exchanged. As you may understand, this will require a lot of time and effort from both parties. Money essentially solves this problem because it can act as a medium of exchange and it is generally acceptable by everyone.

In times of low liquidity, when money is scarce, barter is another alternative to completing a transaction. A significant number of ads online and in the press are now requesting for the exchange of goods. This is because people know that money is limited. The sellers and buyers are prepared to spend more time searching for an appropriate counterpart to complete a barter transaction.

Because when the money is not there, time is all you have left.

Have a high utility day!


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