illustrating the theory - Monetary economy. Theory of money and credit

illustrating the theory

Suppose, in a primitive society, the preferences of three individuals are known with regard to the three main products produced in a given economy:

Individual

The subject of its production

Utility in consumption for an individual

Bread

Apples

Wine

A

Bread

0.5

0

1

In

Apples

1

0.5

0

C

Wine

0

1

0.5

1. Is direct exchange possible (direct barter) in a given economy?

2. What problems do the exchange participants face in this economy? Parsing a Problem

1. Since the mutual desires of people do not coincide (this is indicated by their preferences, relative values ​​of goods for each of them), direct barter in this economy is impossible.

Indirect barter may include such interactions (Figure 1.1).

Illustration of indirect barter

Fig. 1.1. Illustration of indirect barter

2. The participants in the exchange in this economy face the following problems.

Indirect barter leads to a loss of utility. Instead of the maximum possible utility at a rate of 1 with direct barter, one can get at most only 0.5 at best.

If individuals are not very familiar with each other, there is a problem of comparing the quality of the goods due to distrust to the counterparty and the impossibility of direct quality control before the conclusion of the transaction.

Even if the exchange can be carried out, the problem arises of storing the goods for the subsequent transaction. Each of the participants is forced to purchase an intermediate product, which is not necessary for him directly, but serves as a factor of exchange for the desired product in the future.

With the growth of the number of goods exchanged, the problem of trust arises and intensifies. When the same farmer exchanges his wheat for the mammoth skins produced by the same familiar hunter, the regularity of transactions between them and their personal acquaintance with each other guarantees the appropriate quality of the goods. But the more goods produced in the economy, the greater the number of sellers and buyers is involved in the exchange. In this case, the exchange will cover not only well-known people, but also strangers, transactions with which, perhaps, will be of a single nature.

If the seller and the buyer know that their meeting is random and will not be repeated in the future, it will be difficult for them to trust each other, especially if the quality of the goods can not be verified before the exchange. If the hunter does not understand the grains, how can he verify that the farmer gives him exactly the wheat for the mammoth skin? He would, of course, prefer in exchange for his goods to receive something that does not require detailed and laborious study and will be accepted by everyone in the future if the hunter decides to exchange it later for any other products.

In addition, when the exchange entails not instant calculation but is made on credit (because of the different production time of goods), the presence or absence of information on the future creditworthiness of the counterparties of the transaction becomes important. Each individual should be sure that by the time of the final calculation, the purchased goods will be available, of proper quality and in due quantity.

Hint

Problems of barter economy:

1) high transaction costs:

- the problem of the coincidence of goods for exchange;

- the multiplicity of prices;

- the incompatibility of prices and the evaluation of benefits from the exchange;

- the problem of assessing the quality of goods exchanged;

- transportation problem;

- problem of storage of goods (stock problem);

- the lack of standardization of copies of products;

2) the problem of trust:

- the uncertainty of the quality of the goods and the reputation of the seller and buyer;

- high risk of fraud;

- the problem of the future creditworthiness of the counterparty.

Barter exchange, repeated many times, with different people unrelated to each other and often unfamiliar with each other, during the evolution of the instruments of exchange generates a special commodity, to which the exchange participants begin to resort not from time to time, but constantly.

The characteristics of such products for indirect barter and numerous independent transactions include:

• Durability;

• high divisibility without loss of value;

• displaceability for different distances;

• homogeneity of parts;

• ease in assessing the value of even an unsophisticated merchant;

• availability of a relatively developed market for circulation in convenient locations;

• the presence of a fairly stable and relatively cheap production.

This is how money is born - a special commodity considered by all or most of the participants as a universal means of exchange, the universal equivalent of goods and services produced in any economy. Standardized barter goods, used by most participants of the transaction to minimize business risks and reduce transaction costs, gradually turns into money - the only tool for dealing with exchange transactions.

Quiz

Alexei grows apples and loves fried potatoes. Marina has her own potato field, and she fries potatoes well. But she does not like apples and prefers strawberries to all fruits. The owner of the strawberry Sasha is ready to change the entire crop for apples, and his potatoes are not interested. What problems can Alexey face if he decides to exchange his apples for Sasha's strawberries today, anticipating the pleasure of roast potatoes that he supposes Marina will cook for him in a week in exchange for strawberries?

Thus, the uncertainty of economic interactions, the risk of fraud, the complexity of checking the business reputation of exchange participants, and the high costs of doing business in the era of barter are at the heart of the emergence of money. Money expresses self-fulfilling expectations: an individual considers money as an object that, in his opinion, all other business entities will accept as money.

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