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Chapter 25: Problem 6

In November 2016 , the Indian government decided to withdraw paper currency that made up more than 86 percent of the value of all rupee bills in circulation. An article in the Wall Street Journal published shortly after that decision described a small merchant in India as having "traded one customer a kilogram of potatoes, cauliflower and tomatoes for half a liter of honey. That was a good deal, he says. In normal times, the honey would be 120 rupees in the market (around \(\$ 1.80\) ) and the vegetables 70 rupees." Is this merchant's ability to arrange a barter deal with a customer an indication that the Indian economy doesn't actually require money to function efficiently? Briefly explain.

Short Answer

Expert verified
While the ability to barter can facilitate individual transactions, it doesn't indicate that an economy can function efficiently without money. Money simplifies and standardizes transactions, thus significantly increasing economic efficiency.

Step by step solution

01

Understanding the Barter System

Recognize the barter system as an ancient method of exchange where goods or services were directly exchanged for other goods or services without any intermediary such as money. In this given scenario, a merchant traded vegetables for honey.
02

Analyzing Efficiency of Barter System

Analyze the efficiency of a barter system. It is important to note that a barter system lacks divisibility, has problems with storing value, and significantly lacks a universal medium of exchange which can hinder efficiency.
03

Understanding the Role of Money

Understand that money serves as a common medium of exchange, a unit of measurement for value and a store of value, enhancing the overall efficiency of transactions in an economy.
04

Conclude the Exercise

While the barter transaction was successful in this scenario, it does not necessarily mean that the entire economy can function efficiently in this manner. The absence of money would make transactions more difficult on a large scale.

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