Q.Elucidate the functions of money. How does money overcome the shortcomings of Barter system?
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Let’s start with something you’ve done a hundred times: swapping your lunch with a friend. You give them your packet of chips, they give you their chocolate. No money changes hands. That’s barter — the direct exchange of goods for goods.
Now imagine you want to buy a new phone, but the shopkeeper doesn’t want your old bicycle. You’d have to find someone who wants that bicycle and also has something the shopkeeper wants. That’s the core problem: barter only works when each person wants exactly what the other has — a double coincidence of wants.
What is the Barter System?
The barter system is the oldest form of trade — goods and services are exchanged directly for other goods and services, without using money. NCERT (Class 12 Macroeconomics, Chapter 3) introduces it as the starting point before explaining why money was invented.
Barter = direct exchange. No medium like currency or coins is used.
The Four Major Drawbacks (as per NCERT)
1. Lack of Double Coincidence of Wants
This is the biggest hurdle. For a trade to happen, you must have what the other person wants, and they must have what you want. If you have rice and want shoes, you need to find a shoemaker who wants rice. If the shoemaker wants cloth instead, you’re stuck.
This is not just an inconvenience — it can make trade impossible. Many potential exchanges simply never happen.
2. Absence of a Common Measure of Value
How many kilograms of wheat is a pair of shoes worth? There’s no standard unit. Every trade requires a separate negotiation of relative value. This makes comparing prices across different goods extremely difficult. You can’t say “this is cheaper than that” without a common yardstick.
3. Indivisibility of Goods
Some goods cannot be split without losing value. Suppose you want to buy a cow, but you only have a sack of grain worth half a cow. You can’t give half a cow to the seller — the cow is indivisible. You’d have to find someone who wants exactly your grain and has something worth exactly that, which is rare.
4. Difficulty in Storing Value
Perishable goods (milk, vegetables, meat) cannot be stored for long. If you produce more than you need today, you can’t easily save that surplus for future trade. Even durable goods like grain can rot or be eaten by pests. There’s no reliable way to hold purchasing power over time.
Why These Drawbacks Matter …
Money was invented to overcome the difficulties of the barter system, and it does so through the functions it performs.
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Money's functions — medium of exchange, measure of value, store of value, standard of deferred payments — directly solve the four main drawbacks of the barter system.
In the money and banking chapter (Karnataka 2nd PUC), money is anything generally accepted as a means of payment.
Functions of money:
Primary functions:
- Medium of exchange — money is generally accepted in exchange for goods and services, so goods can be bought and sold using money instead of exchanging goods for goods.
- Measure of value (unit of account) — the value of every good and service is expressed in terms of money (price), giving a common unit for comparison.
Secondary functions:
3. Store of value — money can be saved and stored for future use because it holds its value over time and is easy to keep.
4. Standard of deferred payments — money serves as the unit in which future (deferred) payments such as loans, salaries and instalments are stated and settled.
How money overcomes the drawbacks of the barter system: Under barter, goods were directly exchanged for goods, which had serious drawbacks that money removes:
| Drawback of Barter | How Money Overcomes It |
|---|---|
| Lack of double coincidence of wants (both parties must want each other's goods) | Money is generally accepted, so a person can sell his good for money and buy any other good — no double coincidence needed. |
| Lack of a common measure of value (hard to fix exchange ratios) | Money provides a common measure — every good has a price in money, making exchange easy. |
| Difficulty in storing value (goods perish) | Money is a durable store of value, so wealth can be stored conveniently. |
Showing the 12 most recent of 20 on this concept.
- CBSE 2026Set 58/2/11 markMCQQ.Identify, that function of money, which has effectively solved the problem of 'double coincidence of wants' in a transaction. Options : (A) Standard of deferred payments (B) Store of value (C) Measure of value (D) Medium of exchange
›Reveal solutionSolution
The problem of 'double coincidence of wants' arises in a barter system where two parties must simultaneously desire each other's goods for an exchange to occur. Money, by serving as a medium of exchange, effectively solves this problem by separating the act of buying from the act of selling.
Before the advent of money, societies relied on a barter system for exchange. In a barter economy, goods and services are directly exchanged for other goods and services without the use of a common medium. This system, however, faced a fundamental challenge known as the 'double coincidence of wants'.
The 'double coincidence of wants' means that for a transaction to take place, two individuals must simultaneously possess goods that the other person wants to acquire. For example, if person A has wheat and wants shoes, they must find person B who not only has shoes but also wants wheat. If person B wants clothes instead of wheat, no direct exchange can occur between A and B, even if both have something the other might eventually want. This requirement makes transactions incredibly difficult, time-consuming, and inefficient, severely limiting the scope of trade and specialization in an economy.
Money emerged as a solution to this inherent problem of the barter system. Let's examine how its functions relate to solving the double coincidence of wants:
- Medium of Exchange: This is the primary function of money that directly addresses the double coincidence of wants. When money acts as a medium of exchange, it means that goods and services are exchanged for money, and then money is exchanged for other goods and services. Person A sells their wheat for money, and then uses that money to buy shoes from person B. Person B sells their shoes for money, and then uses that money to buy clothes from person C. The need for person B to want person A's wheat is eliminated. Money breaks the direct link between two specific goods, allowing individuals to sell what they have for money and then buy what they want with that money, without needing to find someone who wants exactly what they are offering.
Let's briefly consider why the other options, while important functions of money, do not directly solve the double coincidence of wants:
- (A) Standard of deferred payments: This function refers to money's ability to serve as a standard for future payments, such as loans or credit transactions. While crucial for a modern economy, it deals with inter-temporal exchanges and does not directly resolve the immediate problem of finding a mutual want for current transactions. …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: In the ________ system it is difficult to carry forward one's wealth.
›Reveal solutionSolution
The blank is filled by 'barter'.
In a barter system goods are exchanged directly for goods, with no money as a store of value. To carry wealth into the future a person would have to hold it as stocks of goods, but most goods perish, deteriorate or are costly to store, so preserving and carrying forward one's wealth is very difficult. T …
- CBSE 2026Set ANNUAL1 markMCQQ.Write True or False: Economic exchanges without the mediation of money are referred to as barter exchanges.(a) True(b) False
›Reveal solutionSolution
True — exchange without money is barter.
The barter system is the exchange of goods and services directly for other goods and services, without the use of money as a medium of exchange. So economic exchanges carried out without the mediation of money are indeed barter excha …
- CBSE 2026Set ANNUAL1 markMCQQ.Read the following dialogue between Sara and Rahul: Sara: I want to shift to Singapore. What do I do with my house? Rahul: I can give you 10 antique pieces. Sara: But I do not need antique pieces. Rahul: Then let the house remain where it is. Which of the following problems is being faced by Sara and Rahul in their exchange process?(a) Lack of medium of exchange(b) Lack of transfer of value(c) Lack of store of value(d) Lack of standard of deferred payment
›Reveal solutionSolution
Sara and Rahul are facing the classic barter-economy problem of the "double coincidence of wants" — this is solved only by a common medium of exchange, i.e. money.
In a barter economy, goods are exchanged directly for other goods, with no common medium that both parties accept. For a barter exchange to succeed, there must be a double coincidence of wants — Sara must want exactly what Rahul is offering (antique pieces), AND Rahul must want exactly what Sara is offering (the house, or something convertible from it). Here:
- Sara wants to liquidate her house into something more generally useful/portable before moving abroad.
- Rahul can only offer antique pieces — but Sara does not want antique pieces.
- As a result, no exchange can take place, even though both parties may genuinely want to trade.
This deadlock arises specifically because there is no medium of exchange — money — that Sara could accept in place of the house (and later use to buy whatever she actually needs in Singapore). Money solves this by being universally acceptable, so a seller never needs to find a buyer who also happens to want to sell exactly what the seller wants in return.
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- CBSE 2025Set ANNUAL1 markMCQQ.Which one of the following is the difficulty of Barter system? (A) Lack of double coincidence (B) Difficulty in division of the goods (C) Lack of general acceptable measure of value (D) All of these
›Reveal solutionSolution
All listed problems are barter difficulties, so the answer is (D) All of these.
Barter means direct exchange of one good for another without money, and it broke down for several reasons: (A) lack of double coincidence of wants — both parties must want what the other offers at the same time; (B) difficulty in dividing goods — many goods (like cattle) cannot be split for small transactions; and (C) lack of a common, generally acceptable measure of value, making it hard to express p …
- CBSE 2025Set ANNUAL1 markQ.Fill in the blank: Money is the commonly accepted as medium of ________.
›Reveal solutionSolution
The blank is 'exchange' — money is the commonly accepted medium of exchange.
In the RBSE/CBSE Class-12 money-and-banking chapter, the most basic function of money is to serve as a medium of exchange. Instead of swapping one good directly for another (barter), people sell goods for money and use that money to buy whatever they need. This removes the 'd …
- CBSE 2025Set ANNUAL1 markMCQQ.Money can be used to transfer purchasing power from the present to the future. Which specific function of money is being highlighted here? (A) Medium of exchange (B) Common measure of value (C) Store of value (D) Standard of deferred payment
›Reveal solutionSolution
Holding money (or money-denominated assets) to carry purchasing power from the present into the future is the store-of-value function of money, distinct from its roles as a medium of exchange, measure of value, or standard of deferred payment.
Money performs several functions: as a medium of exchange it facilitates the immediate exchange of goods and services; as a common measure of value it expresses the worth of goods in a common unit (price); as a standard of deferred payment it allows debts/credit transactions to be settled in the future in money terms. The store-of-value function specifically refers to money's ability to retain purchas …
- CBSE 2024Set 58/2/11 markMCQQ.Read the following statements carefully: Statement 1: Money is a commodity which is generally accepted as a medium of exchange. Statement 2: Money solved the problem of double coincidence of wants. In the light of the given statements, choose the correct alternative from the following: (A) Statement 1 is true and statement 2 is false. (B) Statement 1 is false and statement 2 is true. (C) Both statements 1 and 2 are true. (D) Both statements 1 and 2 are false.
›Reveal solutionSolution
Both statements are correct: money is a widely accepted medium of exchange, and it eliminates the need for a double coincidence of wants that plagues barter systems.
Let's begin with the first statement. Money, in its simplest definition, is anything that is generally accepted in payment for goods and services or in the settlement of debts. It is worth emphasising that money is not just a commodity like any other — it is a commodity in the sense that it has value and can be bought and sold, but its defining feature is that people accept it willingly in exchange. Historically, many things have served as money: cattle, shells, precious metals. Today, currency notes and coins are the most common forms. So Statement 1 is accurate. …
- CBSE 2024Set MARCH1 markMCQQ.Money is(a) A medium of exchange(b) A unit of account(c) Both(a) &(b)(d) None
›Reveal solutionSolution
Money is both a medium of exchange and a unit of account (among its functions), so the answer is 'Both' — a key Kerala Plus Two (DHSE) money concept.
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- CBSE 2024Set MARCH1 markQ.Match the following (Column A item: Money):
A B 11) SMC a) Zero profit 12) Normal Profit b) Non-monetary exchange 13) Domestic service c) ΔTC/ΔQ 14) Money d) Trade in goods and services 15) Balance of payment e) QD = QS f) Medium of Exchange ›Reveal solutionSolution
Money matches (f) Medium of Exchange.
The most important function of money is to act as a medium of exchange. In a barter system a transaction required a double coincidence of wants, which was difficult. Money, being generally acceptable, can be used to buy any good or service and to sell any good or service, so exchange is split into two easy transac …
- CBSE 2024Set ANNUAL1 markMCQQ.What are the advantages of Barter system? (A) Simple system (B) More mutual co-operation (C) No economic disparities (D) All of these
›Reveal solutionSolution
A simple system, greater mutual co-operation and fewer economic disparities are all cited advantages of barter, so the answer is (D).
In the BSEB Inter / Class-12 Economics money-and-banking unit, the barter system is the direct exchange of goods for goods, without money. Although it had serious drawbacks (lack of double coincidence of wants, no common measure of value, difficulty in storing value), it also had some advantages: (A) it was a simple, self-sufficient system suited to small communities; (B) it promoted mutual co-operation and personal relations among people; and (C) being based on direct exchange, it tended to limit the …
- CBSE 2024Set ANNUAL1 markMCQQ.Write True or False: Measurement of value was very difficult in the barter system of exchange.(a) True(b) False
›Reveal solutionSolution
True — measuring value was a serious difficulty under barter.
One of the main drawbacks of the barter system was the absence of a common measure of value. With no single unit in which the worth of all goods could be expressed, every good had to be valued in terms of every other good, making exchange and accounting extremely difficult. Money solved th …
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