Barter system cannot function wel
Answers
Answer:
Barter system cannot function well due to the following limitations:
1. Lack of Double Coincidence of Wants
Barter system can work only when both buyer and seller are ready to exchange each other’s goods. For example, A can exchange goods with B only when A has what B wants and B has what A wants. However, such double coincidence is very rare.
2. Lack of Common Measure of Value
In the barter system, all commodities are not of equal value and there is no common measure (unit) of value of goods and services, in which exchange ratios can be expressed. For example, if A has wheat and B has rice, then it is difficult to decide, how much wheat is needed to exchange with one kilogram of rice. In the absence of common measure, the exchange ratio is fixed randomly, in which one of the party generally suffers.
Barter system can work with few commodities in the primitive society. However, it is very difficult in the modern economy, where we need millions of exchange ratios for a large number of goods and services.
3. Lack of Standard of Deferred Payment
Under barter system, contracts involving future payments or credit transactions cannot take place with ease because of following reasons:
(a) The borrower may not be able to arrange goods of exactly same quality at the time of repayment.
(b) There may be conflicts regarding which specific commodity is to be used for repayment.
(c) The commodity to be repaid may lose or gain its value at the time of repayment.
So, it is very difficult to make deferred payments in the form of goods.
4. Lack of Store of Value
Under barter system, it is difficult for people to store wealth for future use because:
(a) Most of the goods (like wheat, rice, vegetables, etc.) do not possess durability, i.e. their quality deteriorates with passage of time.
(b) Storage of goods requires time and efforts.
As a result, goods cannot be used to store the earnings for a long period.
Answer:
Real GDP is nominal GDP adjusted for: