Agro is a simple economy.
All economic agents own land which they can devote to farming.
Farms in Agro produce only three commodities:
wheat, cattle and arugula.
Farms in Agro are varied in their characteristics, and farmers are varied in their skills.
result, each farmer is endowed with a different production technology.
This means that the
relative quantities of wheat, arugula and cattle produced will vary across farms.
In addition, farmers are able to devote some of their time to various services:
milling wheat into
flour, baking bread, tossing salads, butchering cattle and making roast beef and arugula
Again, the varied production technologies of the various farmers will imply that
any two farmers are likely to choose completely different ways to allocate their time between
farming and these other activities.
In this economy the following commodities will potentially be traded:
farm land, wheat, cattle,
arugula, beef, flour, bread, salad and roast-beef-and-arugula sandwiches.
Explain what is meant by “double coincidence of wants, and why it poses an
impediment to efficient trade in a barter economy.
Choose three of the traded commodities and discuss the merits of each as a potential
form of “commodity money.”
Be sure to address how each would fare filling the three
roles of money discussed in class:
as a store of value, as a unit of account and as a
medium of exchange.
Which of the commodities would you anticipate would be
embraced as commodity money?
Textbooks (including ours) identify three roles for money:
money is a unit of account, a store of
value and acts as a medium of exchange. Give a brief description of these terms, highlighting the
“problem” that money is solving in each case.
Are these three roles independent of each other?
To address this question, think about the
Suppose money exists in an economy, and fulfills all three roles mentioned above.
Now suppose that the government directs the central bank to print large quantities of extra
currency, and uses that currency to buy goods and services.
What do you predict will happen to
the currency as a store of value?
Will it make sense for the unit of currency to remain the unit
In view of the changes you list here, do you think that the currency will continue to
be accepted as a medium of exchange?
Can you find historical examples of situations where
these changes occurred?
If the local currency is rejected as a unit of account and a medium of
exchange, what alternatives might be found to take its place?