1.5 Barter
This video is relevant for this section despite it saying that it is for AQA.
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Monetary System
In an economy, we have a variety of economic agents, such as consumers and producers. Consumers want to satisfy their wants and needs and therefore consume goods and services. Producers produce the goods and services and then sell these to the consumers in return for money. The money flows from households to producers and the goods flow the other way. The coming together of buyers and sellers is known as a market and this could be anywhere, such as online, a shop or a street market. We also have a second market where the roles are reversed. Firms demand the factors of production owned by households in exchange for wages, rent, dividends or interest. This is known as a factor market.
Both the goods market and the factor market together are known as the circular flow of income. It is interested in the relationship between households and firms. In microeconomics we are concerned with what goods are produced and how the factors of production are used to create the goods. Whereas in macroeconomics we are concerned with the size of the flow and what causes the fluctuation in the flow (will be discussed more in econ2).
Barter
The economic system that I have explained above is related to a monetary economy. As there is money in this economy, households can pay for goods and services and producers can compensate households for the factors of production that they provide. The use of money overcomes the problems associated with barter. A barter economy is an economy with no cash. Goods and services are exchanged at negotiated rates. Let’s say I decided to work on a farm. In a monetary economy I would be paid £50. In a barter economy, I would still be paid but it would be in food (vegetable or meat) or something else that I wanted rather than in money. Bartering can increase the connectedness that you have with the sale but there are a couple of drawbacks. The biggest problem is that you can only trade with people who you know. If you don’t know anyone who is offering something that you want or is willing to accept something of yours, then you won’t be able to get it through barter. Money overcomes this problem because it is easily exchangeable with other people. Money can buy any good because it is accepted by everyone. However, sometimes people can lose faith in the monetary system and then switch to bartering. When hyperinflation (a situation where price increases are so out of control that the concept of inflation is meaningless) occurs when economic agents may choose to barter for goods and services that they want as using money would be stupid.
In an economy, we have a variety of economic agents, such as consumers and producers. Consumers want to satisfy their wants and needs and therefore consume goods and services. Producers produce the goods and services and then sell these to the consumers in return for money. The money flows from households to producers and the goods flow the other way. The coming together of buyers and sellers is known as a market and this could be anywhere, such as online, a shop or a street market. We also have a second market where the roles are reversed. Firms demand the factors of production owned by households in exchange for wages, rent, dividends or interest. This is known as a factor market.
Both the goods market and the factor market together are known as the circular flow of income. It is interested in the relationship between households and firms. In microeconomics we are concerned with what goods are produced and how the factors of production are used to create the goods. Whereas in macroeconomics we are concerned with the size of the flow and what causes the fluctuation in the flow (will be discussed more in econ2).
Barter
The economic system that I have explained above is related to a monetary economy. As there is money in this economy, households can pay for goods and services and producers can compensate households for the factors of production that they provide. The use of money overcomes the problems associated with barter. A barter economy is an economy with no cash. Goods and services are exchanged at negotiated rates. Let’s say I decided to work on a farm. In a monetary economy I would be paid £50. In a barter economy, I would still be paid but it would be in food (vegetable or meat) or something else that I wanted rather than in money. Bartering can increase the connectedness that you have with the sale but there are a couple of drawbacks. The biggest problem is that you can only trade with people who you know. If you don’t know anyone who is offering something that you want or is willing to accept something of yours, then you won’t be able to get it through barter. Money overcomes this problem because it is easily exchangeable with other people. Money can buy any good because it is accepted by everyone. However, sometimes people can lose faith in the monetary system and then switch to bartering. When hyperinflation (a situation where price increases are so out of control that the concept of inflation is meaningless) occurs when economic agents may choose to barter for goods and services that they want as using money would be stupid.