What is Barter system? Features and Inconveniences of Barter System

A system of direct exchange of one commodity or service for another without the use of money is called barter system. One has to exchange the product which one has in excess with those who have other surplus product with themselves. In old age and still in backward areas, the blacksmiths, carpenters, cloth merchants etc. are used to receive wheat in exchange for their goods and services.

Features of Barter System

• The main features of barter system are as under:
• It generally flourishes among uncivilized and backward communities
• It is possible only if the wants of members of a community are a few one, the area of exchange is limited and the community is living under very primitive conditions
• It requires the double coincidence of wants
• It takes place only when the ratio of exchange between two commodities is already determined.
• It eliminates the use of money
• It is now used in the modern foreign trade because of having good impact on balance of payment of the trading countries.

Inconveniences of Barter System

The main inconveniences of barter system are as under:

1. Lack of Double coincidence of Wants

This is the main inconvenience of barter system. Any barter transaction cannot take place unless wants of two persons do not coincide. For example, one person is having surplus wheat and requires cloth; the other person must have surplus cloth and must require wheat. This is double coincidence of wants.

2. Lake of common Measure

The second difficulty of barter system is the lack of common measure of value. The trading persons have to decide the ratio of exchange of two commodities when their wants coincide. If they fail to decide the ratio of exchange, barter does not take place. The ratio of exchange between two commodities may differ from time to time and place to place and even from person to person. In other words, we can say that there is no common measure of value of goods and services in barter economy. In absence of a common measure (the commodity in terms of which the value of other commodities may be measured) the exchange of goods becomes difficult.

3. Lake of Sub-division

The third problem may arise when the commodities are indivisible even if wants coincide. For example, if a man has a cow with him and wishes to get one maund of wheat, the transaction between the persons having cow and wheat will not take place because the value of cow is more than one maund of wheat and first man does not need more than one maund of wheat. Definitely, the man having cow will not cut his cow and give a part of it. So the indivisibly may stand in the way of transaction.

4. Lake of Store of Value

It is very difficult to store the perishable commodities used in barter for a long period of time. Such commodities lose their value with the passage of time, hence no body would like to store something in the form of wheat, cow, vegetable, etc. for future contingencies. So, the barter economy faces the difficulty of store of earnings for a longer period of time.

5. Difficulty of Future Payments

It is difficult to lend goods to other people because at the time of repayment the goods may not be of the same value.

6. Difficulty of Transfer of Wealth

One can’t transfer one’s wealth conveniently from one place to another. For example, if a person has to take one hundred heads of sheep from Gujranwala to Karachi, how much difficulty would he feel?

7. Difficulty of Finance Minister

The finance minister would find it difficult to levy and collects tax in the form of goods. If possible, tax collected can’t be conveniently utilized for development and non-development purposes

How does money remove the difficulties of barter system?

The introduction of money has removed the difficulties/inconveniences of barter system. It is clear from the following points:

1. Double coincidence of wants

Harter economy requires the double coincidence of wants in exchange for all goods and services. A man having a surplus commodity can sell it for money He can use this amount of money for buying goods of his consumption Thus, there is no need of double coincidence of wants.

2. Common Measure

In barter economy, people face the problem of deciding the ratio of exchange between the two commodities. There is nothing in terms of which the value of a commodity or service can be determined. The introduction of money has removed this difficulty. Now the value of goods and services can easily be determined in terms of money. So money has been accepted as a common measure of value, since its introduction.

3. Sub-division

The barter system gives no solution to the problem of sub-division of certain commodities if one wishes to exchange an indivisible thing of greater value for a thing of lesser value. In money economy, there is no such problem.

4. Store of value

One can store one’s earning in terms of money without any problem even for a longer period of time

5. Deferred payments

Money has solved the problem of deferred payments. The borrowing and lending now take place in money terms and there is no problem is receiving and making payments in future.

6. Transfer of Wealth

The transfer of wealth from one place to another was a great problem. After the introduction of money, people are happy as they can comfortably transfer their wealth from one place to another.

7. Tax Collection

The collection of tax was practically impossible in barter economy. Money solved this problem. Due to the introduction of money, the tax system is working quite successfully.

8. Development of Banking System

Money is an integral part of banking system. Without money the concept of banking system seems to be meaningless. The barter system gives no idea of banking.