Question

3. (a) Explain the major problem of the barter system. (1 Mark) (b) Explain the three functions of money. (3 Marks) (c) What are the advantage and disadvantage of using cryptocurrency? (1 Mark) Page 7 of 7

Answer 1

Q. 3 (a)

Barter System is an ancient exchange method used before the invention of money. In this method instead of money, products and services had been exchanged for products and services. Following are the major problems of barter system.

• Absence of information regarding the value of products and services. Because of this issue, people will simply exchange products of high value to products of low value. They were not at all aware of the value.
• Manufacturing of huge and costly products which are not convenient. In order to buy anything through barter system, people need to exchange what ever the seller ask. So in order to get the product, people simply makes goods or services costing high and this causes loss to him.
• Sub division of goods are not possible. Determining the rate of exchange for indivisible goods is very inconvenient in barter system. It makes the barter system inoperative.
• Scarcity of standard unit of account. It is one of the major problem in barter system. It does not have proper measure of standards for calculating the value.
• Double chance of needs. Barter system will work only if one person is willing to buy a product that another person have in exchange of the product that the same person have to exchange. Therefore the double chance of needs for both the parties is very crucial for happening of exchange in the barter system.

(b)

Money is a verifiable product which is used for payment in case of debts, products and services, taxes etc. Following are the functions of money.

1. Medium of Exchange :

An exchange made without money exchange is considered to be barter. Money serves as a medium of payment worth its value in exchange of all products. Also money prevents the issue of double chance of needs among parties. As money can act as a medium for payment in all transactions all over the world.

2. Unit of account :

Money serve as a unit of account as it bring general calculation of the exchanged product value.

3. Store of value :

Money can be hold by anyone for lifelong as money keeps its value in its entire lifetime. But money value will gets reduced by inflation. So it is better to keep money in the form of assets such as Land, Art works etc whose value will only increase as years passes. But on the other hand money serves as the most liquid form of value than any other assets.

(c)

Cryptocurrency is a form of digital currency where techniques of encryption are utilized in order to control currency units and check fund transfer which works without a central bank. This currency is used for protecting financial transactions, regulating additional units creation as well as assess the asset transfer.

Advantages :-

• While comparing with other digital payments, cryptocurrency holds very less cost of transaction.
• As cryptocurrency is a decentralized currency, cryptocurrency allows convenient trading globally easily.
• The value of cryptocurrency can not be increased or decreased by Central Government.

Disadvantages :-

• No refunds for any transactions paid.
• The goodwill and utility will be destroyed by the activities of black market.
• Capable of high price inflammation.
• Having the aptitude or power to be substituted by superior cryptocurrency.