Question

Define barter and state the problem it entails? Why is money as a medium of exchange so important in our society? Are you required by law to pay income taxes on barter benefits? *The IRS website at https://www.irs.gov/taxtopics/tc420.html (Links to an external site.)Links to an external site. might provide part of the information requested. The other may be found in your text and/or by searching the web.

Answer 1

1. Barter system is the oldest form of exchange where goods are exchanged for goods. It was a primitive exchange system where people exchange goods with each other to satisfy their needs. In modern day trade and commerce barter system cannot be suitable. Barter system has many problems like

1. Lack of double coincidence of wants

2. It's not a common measure of value

3. It is no a common medium of exchange

4. It cannot be used for deferred payment

5. It cannot be used for store of value

2. After the invention of money, it has been accepted as a common medium of exchange. It can be used to make payment for all transactions of goods and services. Money has the general acceptability. It overcomes all the difficulties of barter system. It also facilitate trade and helps in making business transactions. It can be used as a store of value. It can be used for deferred payments. It is the common measure of all goods and services.

3. Many barter exchanges are not taxable unless it is not reported. However, if the parties are involving in a barter trade they need to determine the value of exchange. But it's hypothetical to think taxable barter system.