Barter is the method of exchange in which services or goods are exchanged directly for other services and goods without using any medium of exchange like money. Usually, it is bilateral but it can be multilateral. It exists in most of the developed countries parallel to the monetary system but for the limited extent. At time of the monetary crisis, money is replaced by the barter as a method of exchange. Barter exchange or trade is the commercial organization which provides a bookkeeping system and trade platform for its clients or members. The companies, who are members of barter exchange, can sell and buy the services and products from each other by using the internal currency which is known as trade dollars or barter. Modern trade and barter is an effective method of conserving cash, increasing sales and moving inventory. In the barter exchange, the companies earn barter credits which will be deposited into their respective accounts. Then the companies get ability to purchase services and goods by utilizing their credits from the other members of barter exchange. It plays a vital role because each member of barter exchange is provided with the monthly statement, brokering expertise and record keeping. It is estimated that in United States over 350,000 businesses are involved in the activities of barter exchange. Approximately there are 400 corporate and commercial barter companies all over the world. In US and Canada, many major cities currently do not have the local barter exchange. There are two barter exchanges, one is international reciprocal trade association and another is national association of trade exchange. Both of these barter exchanges have created their own currency. The currency for NATE is BANC and currency for IRTA is universal currency. The first barter exchange was Swiss WIR bank. It was formed in year 1934 after the crash of stock market in 1929. The numbers of barter exchanges are growing in Spain basically in the Catalonia region. According to IRTA, total transaction in 2008 was $ 10 billion around the globe and it is expected that it will increase by 15% in year 2009 and more than 400,000 businesses are involved in barter exchange.
The characteristics of money
The first characteristic of money is durability. It means that a product retains the same shape, substance and form over the period of time. It does not easily degrade, decompose and deteriorate in other form. It includes the social, physical and institutional durability. It is critical to perform the functions store of value and medium of exchange. Physical durability is important for money and institutional and social money is important for the modern economies. The durability of bank account balances and paper currency depends on the social institutions such as government and banks. Another characteristic of money is divisibility. It means that money is divided into the small increments and these increments can be used in exchanging goods of different values. It is better if the divisions are smaller. It is one of the reasons why metal like silver, gold and copper are used widely as money. Money, medium of exchange, can be used to buy a wide range of product of different values, and then it should be divisible. Another characteristic of money is transportability. It means that money can be moved easily from one place to another when these movements are needed to complete the exchanges. When people go to the market to buy one or more products then they need to carry money along with them. So, money is transportable. It plays a vital role in use of metals such as silver, gold, nickel and copper as money. In the 20th century, these metals were replaced by the paper currencies. On the transportability scale, the items like granite blocks, maple syrup and radioactive plutonium come up short. The products require special handling which are physically heavy than their value in money. These items are not transported easily. The fourth characteristic of money is non counterfeit ability. It means that the exchange can not be duplicated easily. If everyone is able to make up, whip up or print up a batch of money than it cannot be used as the medium of exchange. The government is assigned with the task to prevent the duplication of money. The prime reason for existence of the government is this task. An economy requires absolute government to check the total amount of money in circulation. Government have tried various methods to thwart counterfeiters by using special paper and ink for currency, make images on coin and high level security at money production areas. In 1990, the US redesigned their paper currency by adding magnetic strips, microscopic printing and water marks.
Gold backed and fiat money
The opposite of honest money is fiat money. Silver and gold are referred as the
Liquidity
In investment, economics or business, liquidity is an ability of asset to be sold with minimum loss of the value and without any significant movement in price. Money is the liquid asset and can be used to perform economic actions such as selling, buying, paying debt and meeting needs and demands. When more liquid asset is exchange with less liquid asset is called liquidation. Liquidity refers to the ability of business to meet its obligations of payment in term of possessing liquid assets themselves. The essential feature of liquid asset is that there are willing and ready sellers and buyers are present at all times. The probability of executing of next trade at the price equal to the last trade is known as liquidity. An illiquid asset is that asset which is not saleable because of its value and lack of market demand. The liquidity of an item is measured as how often it is sold and brought. Investments in the market like futures markets or stock markets are liquid than the investments in real estate. Some assets are more advantageous with the secondary liquid market. The key contributors of liquidity of asset or market are market markers and speculators. The risk of illiquidity is not in the individual investments but also in whole portfolios. The asset managers and financial institutions who oversee the portfolios are basically subject to the contingent and structural liquidity risk. Sometimes structural liquidity risk is also known as funding liquidity risk. It is a risk which associated with the funding portfolios. Contingent liquidity risk is associated with the additional funds or maturing liabilities under future stressed and potential market conditions. Open market operation is a process when the central government influences the liquidity of money.
The equation of exchange
The equation of exchange is used to identify the mathematical relationship exists between the price level, volume of economic and the money supply. The equation of exchange was first formulated by economist Irving Fisher and the equation is MV + M′V′ = PT. In this equation, M is the stock of currency; V stands for velocity, M′ measures the checkable deposits' quantity and V′ measures the checkable deposits' velocity. Here, P is the price in a transaction and T stands for number of transactions. In the contemporary economic, the simplified equation of exchange is MV = PQ. Here, M is average amount of money present in an economy that includes checkable deposits, currency in circulation, liquid asset and time deposits, V stands for the velocity of money, P stands for price level and Q is the real output. Nominal gross domestic product is determined by PQ and real gross domestic product determined by Y. For the price level, P is the factor standing and it can be calculated by the division of nominal GDP and real GDP. Velocity can be determined by the division of nominal GDP and money stock. The equation of exchange in the percentage form is
% change in V + % change in M = %change in Q + %change in P
It is assumed by the quantity theorists that the velocity of money is stable relatively and V is always zero in the percentage change. The percentage change in Y is 3 percent approximately. If these assumptions are accepted than the inflation rate is 3 percent less than the growth rate of money stock. It means that, if in a year the stock of money grows at 10 percent than rate of inflation is 7 percent.
The quantity theory of money
The classical view of money
The Keynesian view of money
Monetarism
