• Card 12 / 100: Suppose the economy has only four goods: apples, oranges, bananas, and grapes. In barter, how many independent price ratios would exist? (E.g., the apple:orange ratio would not be independent of the orange:apple ratio.)

    Answer:
    There are 4x3=12 different pairs of goods, but only 6 if the order is unimportant. So in a barter economy with four goods, traders would need to keep track of 6 different price ratios. Specifically, they are: apples:oranges, apples:bananas, apples:grapes, oranges:bananas, oranges:grapes, and bananas:grapes. (If you know that 1 apple trades for 2 bananas, then you automatically know that 1 banana trades for half an apple. That's why you only need to keep track of 6 total exchange ratios in this small economy.)

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Capitalism: The Market Economy

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Attribution:  Dr. Robert P. Murphy, Lessons for the Young Economist. (Mises Institute), http://mises.org/document/6215/Lessons-for-the-Young-Economist (Accessed 04 April, 2014). License: Creative Commons BY
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