Direct exchange (barter)

A direct exchange (or barter) occurs when we exchange consumption or producer goods with someone else.* It can be an apple exchanged for an orange or it can be a bag of potatoes exchanged for a bag of tomato seeds.

The difference between a direct and indirect exchange is that when people receive an item during an indirect exchange, they don’t plan on using themselves, whether for consumption or production; they plan on trading the item away to somebody else in the future.

The best part of a monetary economy is that we don’t have to use barter prices and have a huge list with every good or service with every other good or service it can be exchanged with and for how much. For example, if only 20 different types of goods existed, we would have to know 19 different “payments” of goods to each good, which would leave us with 20×19 different exchange ratios. With a monetary system, you just have to know the price of each product in money.

*A consumption good is, for example, a tomato and a producer good is a tomato seed. You can benefit from a consumption good right away, while you have to invest some time (or more things, like soil in our example) into a producer good to make it into a consumption good.

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