Disadvantages of Money

Disadvantages of Money

Disadvantages of money or monetary system can be expressed in terms of artificial shortage created in the market, unequal distribution of income, trade cycles, fluctuation in the money value, and speculation in the market etc.

1.    Artificial Shortages

Disadvantages of money include creation of artificial shortage for profit making. Prices are raised by artificial shortages. Producer reduces supply for increase in price and hold money instead of investment until prices rises. The produce can hold money is , because it store value quality.

2.    Income Distribution Issues

Money has vital importance in capital economy. In capital economy resources are utilized for self interest and overall interest is ignored.  Monetary system promotes accumulation of wealth in few hands and discourages equal distribution of income.

3.    Trade Cycles is Money Phenomena

Monetary system creates trade cycles i.e. boom, decline, recession, recovery. This phenomenon is only characteristics of monetary system. In barter system there is no concept of trade cycle and the economy functions in smooth manner all the time.

4.    Money Value Fluctuation

Disadvantage of monetary system include money value fluctuation. Money value tends to fall with the passage of time due to raise in general price level. Therefore money does not store value in real terms or in long term.

5.    Money Create Speculations

Money creates speculative trend in the market, which may not be representative of actual market conditions. These speculative trends may bring heavy losses to market stakeholder. Speculation can be more clearly observed in stock markets.

6.    Illegal Activities

Monetary system provides more convenience to carry out illegal activities i.e. drugs trafficking, terrorism. Money can be easily transferred to one place to another; therefore illegal activities can be easily funded.

Advantages of Money

Advantages of Money

Advantages of money include large scale production, variety of product, credit & advance transactions, standard pricing, creation of markets, and saving & investment.

1.    Store Value

Money can store value and this is one of the main advantages of money. It means you can use money any time & money can help you in accumulation of wealth. It is important to note that money value also falls with passage of time due to inflation.

1.    Large Scale Production

Large scale production is only possible in monetary system. In barter system only limited goods were produced to satisfy personal needs of producers. Monetary system introduced the concept of large production for business.

2.    Variety of Products

Monetary system made possible the production of variety of goods. In barter system production of goods were based on the daily needs, and there was no concept of luxury & artistic goods. Goods were exchanges for those goods which have fundamental importance in the routine life.

3.    Credit Transactions

Monetary system facilitates the credit transactions. In modern economy credit transactions play fundamental role and all business receives credit and gives credit. In barter system it was not the case, because goods were not a perfect store of value and perishes with passage of time.

4.    Standard Price

Monetary system made it possible to determine the standard price of a product. In barter system this standard pricing was not possible and it was a major limitation of barter system. Concept does not work and exchange is based on the intensity of demand.

5.    Advance Payment

Monetary system support advance payment concept, this concept was not possible in barter system because goods cannot store value like money; there was not concept of future transactions in barter system.

6.    Saving & Investment

In monetary system the concept of saving and investment works. In barter system there is no concept of saving and investment of amounts saved. Barter system was based on immediate consumption of goods.

Properties of Money

Properties of Money

1.    Acceptability of Money

First property of money is its General Acceptability i.e. money should be acceptable in the market to carry out the personal or business transactions. In simple word money should be able to buy good & service in the market.

2.    Money must have Legal backing

Second Property of money is its legality i.e. money could be legally used for transactions. For example a foreign currency cannot be used for domestic purchases, because it is not legal (not authorized).

3.    Convenient Carriage

Third Property of money is easy carriage. Money should support easy & convenient transportation. In other word money should be easy transportable to one place to another. The transport ability was one of the major causes of introduction of paper money in place of coins.

4.    Durability of Money

Fourth Property of money is its durability. Money should not be affected by normal weather condition. Money is expected to show resistance for extreme weather conditions. Currency notes and coins in modern world used special material to ensure its durability.

5.    Divisibility of Money

Fifth Property of money is its divisibility i.e. money should also reasonable divisibility to purchase low value goods.

6.    Standard Design

Sixth Property of money is its standard design. Money should be available in standard form otherwise it would not be considered as legal money. It means legality of money and its design are closely linked.

Functions of Money

Functions of Money

Function of money can be explained in terms of medium of exchange, measurement of value, store of value;

1.    Medium of Exchange

Money works as medium of exchange. In barter system good were used to exchange the goods, which were later on replaced by money. There were number of disadvantages of using goods as medium of exchange i.e. Lack of storage space, deterioration of goods, value determination of goods etc.

2.     Measurement of Value

Money is used to determine or measure of value of different goods. For example we say that Gold is 100 $ per gram, this is very clear understanding of value measurement.

In barter system it was very difficult to determine the value of good. the difficulty faced is being explained with an example ,if 10 gram of gold can be exchange with 10 kg sugar, or 5 kg tea, or 30 mangoes , or 24 apples, then it is very difficult to determine the value of each of above goods.

3.    Money Store Value

Money is used to store value. It means that at any time you can buy anything with money. In barter system, it was difficult to store value in good, because goods are subject to deterioration.

It is important to remember that money is not a perfect source of storing value, because money value also falls over the period of time due to inflation.

Advantages of Barter System

Advantages of Barter System

Advantages of barter system can be explained in terms of inflation, income distribution an economic stability, artificial shortages, and excess production; these concepts or advantages have been explained below;

1.    No Inflation

Inflation is a phenomenon of increasing prices or decreasing the money value. This phenomenon is only relevant in monetary system. In barter system there is no concept of inflation (Continue rise in price).

2.    Equal Income Distribution

Second advantage of barter system is equal distribution of income or little gap in income distribution.  Barter system based on immediate utilization of goods and therefore there in no concept of rich and poor.

3.    Economic Stability

In barter system there is always economic stability, and there are no trade cycles i.e. (boom, decline, depression, recovery). In barter system economy moves in a smooth & stable manner.

4.    No Artificial Shortages

In barter system there is no price mechanism, and therefore artificial shortages of goods are not created for increase in prices of goods. It means that barter system may be term as more fair system than monetary system.

5.    No Excess Production

In barter system goods are produces strictly in accordance of demand, and there is no concept of excess production, because excess production may result in full loss due to lack of storage facilities of goods (Goods can store value only for limited time).

Limitations of Barter System

Limitations of Barter System

Limitations of barter system can be explained in terms of limited good, limited population, market lacking, storage issues, lack of standard value, lack of credit transaction.

1.    Limited Goods Concept

Barter system was only effective for limited goods & limited wants. This system could not serve for large number of goods (variety of Goods), because barter system it is difficult to determine the value of goods.

2.    Limited Population

Barter system was only applicable for small population, where people are producing goods as per the requirements and as per exact demand of user. Barter system supports only demand based production and excess production may result in total loss, therefore barter system is only valid for limited population.

3.    Lack of Market

Barter system does not support the free market concept; rather it is based on the intensity of wants & negotiation between parties. In barter system there is no standardization (Lack of Standard products), therefore a market cannot be created for those Product (Products Lack standardization).

4.    Storage Issue

In Barter system goods served as medium of exchange and therefore a reasonable quantity is required to be store for future transaction. However, it is technically not possible to store goods for too long, especially perishable goods.

5.    Lack of Standard Value

In barter system standard price or value of goods cannot be determined, because valued depends on intensity of demand, which vary customer to customer. For example wheat may be exchanged with cloths, Gold, sugar and value of wheat will be determined by intensity of demand for Gold, sugar etc.

6.    Credit & Advance Transaction Difficulty

In barter system credit transaction was difficult, because there is no mechanism for determining the value of goods in barter system and value is depends on the current intensity of demand.

Properties of Barter System

Properties of Barter System

Barter system is out dated concept and is rarely used in modern world. Barter system was used before introduction of money. Under barter system goods were exchanged for goods, and there was no involvement of money.

1.    No Money Involved

In barter system there was no role of money. Barter system operated without money. Barter system was the only option available, because no money existed in old times. Therefore barter system was not a choice, rather a compulsion.

2.    Goods are used

In barter system goods were used to perform the function of money. Transaction was used to perform by using value of goods. In simple term goods were used in place of modern money i.e. currency notes & coins.

3.    Intensity of Want & Negotiation

Barter system is based on the intensity of want for a good and negotiation between two parties for exchange of goods. Barter system does not support the proper market concept of free economy.

4.    Limited Goods Concept

Barter system is only valid for the limited goods, where the value of goods can be measured in relation to other goods, but in the modern world, where there are a lot of goods, barter system will not work.

5.    Limited Population Concept

Barter system was a limited population concept, where there are limited producer and limited user and exact demand can be determined, because barter system does not support large scale production and believes that there is only limited demand for product and goods should produce up to that demand.

6.    Stable Economy

Barter system ensures stability of economy, there is no artificial shortage and inflation in the barter system. In barter system demand & supply does not depends on the prices and therefore it function in stable and smooth way.