Reasons Why Money Was Introduced In the Economy

In developed market economy, all the exchanges involved in distributing the goods and services produced in “the real world economy” require the use of money as a medium of exchange. Therefore we cannot practice barter system now. Can you think of a few reasons why this is so? We cannot practice barter system now due to the following reasons:

1. Barter system is inefficient and cannot be practiced in a more complex economic system like we now

2.  Barter system failed to provide the “double coincidence of wants”, which means that a person must not only establish contact with someone who has the same but the opposite wants.  This means that a person who wishes to exchange a book for a magazine must find someone else that has a magazine. They must also agree that the book and magazine are have an equal value.

3. The barter system wasted time and energy in searching the market or to find a person in order to establish the double coincidence of wants.

4. The above process of searching for double coincidence of wants results in an unnecessary search costs or transactions costs.

5. Barter system prevents the development of specialization decision of labor and the large-scale production which provide the foundation for the productive efficiency and range of consumer choice available in a modern monetary economy.