7 money chapter 3 i evolution of payment systems

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7 MONEY – Chapter 3 I. Evolution of Payment Systems Tracing the historical evolution of payment systems in various economies is a fascinating and complex task. Although highly simplified, the following three- stage process captures the general way in which this evolution has occurred in many parts of the world . 1. Autarky: Each family or tribal group produces all of what they consume, with the outputs of production being shared in accordance with some kind of group distribution rule determining who gets what and in what amount. No trade takes place and there is no use of money. 2. Barter Payment System: Within family or tribal groups, and possibly between such groups, people trade goods and services for other goods and services. There is no use of money. Under a barter payment system, a " double coincidence of wants " is needed before any trade can take place. That is, two individuals seeking to trade must have exactly the goods or services that each other wants. The requirement of having a double coincidence of wants before exchange can take place discourages specialization and division of labor; for the smaller the number of goods and services one produces for sale, the fewer types of goods and services one can expect to be able to trade for. Multiple Prices for Each Good or Service : Under a barter payment system, many different prices must be maintained for each good and service, making informed decisions about what to buy (and from whom to buy it) extremely difficult. Specifically, an exchange ratio ("goods price") is needed for every distinct pair of items to be traded. For example, given two items (say apples and beer), one needs one goods price (apples per beer or beer per apples, either one will do). For three items (say apples, beer, and cars), one needs three goods prices (e.g., apples per beer, apples per car, and beer per cars). But for four items one needs six prices, for five items one needs ten prices, and so it goes. As the number of items keeps increasing, the number of needed goods prices increases dramatically. More precisely, given a barter economy with n goods, the number of needed goods prices is n[n-1]/2, which is the number of ways that n items can be selected 2 at a time without consideration of order. An equivalent formula for calculating the needed number of goods prices in a barter economy with n goods is the sum of numbers between 1 and n-1, inclusive; i.e., (n-1) + (n-2) + ... + 1. Can you explain why? The above two problems result in high "transaction costs," that is, large amounts of resources (time, effort, shoe leather,...) being spent on trying to exchange goods and services. A barter payment system has several problems that make it extremely inefficient relative to a monetary payment system if a large number of
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