Q: What is the barter system? What are the difficulties of this system and how these difficulties solved?
Barter system is that where no money exists and there is direct exchange of goods services for the other goods & services. In other words “Money less economy” is called “Barter system”
- Simple definition: –
“The direct exchange of one commodity or service for
another with out the use of money is termed as Barter”
2 According to R.H.Parker: –
“Barter is the direct exchange of goods and services
without the use of money as either a mean of payment
or a unit of account”
- According to G.Thomas: –
“Barter is a form of trading in which goods are
exchanged directly for other Roods without the
use of money as an intermediary.”
Barter system is also explained as when goods are exchanged with goods or things are purchased or sold without the help of money.
In olden days, when money was not introduced, the whole of the trade was carried out by Barter system. After the development of economy money was introduced. Barter system is still available in villages and between some countries where commodities are directly imported in exchange of the commodities exported.
Difficulties of Barter system: –
Following are the difficulties of barter system.
- Lack of double coincidence of wants.
- Lack of common measures.
- Indivisibility of commodities.
- Difficulty is storing wealth.
- Difficulty in future payments.
- Difficulty in tax collection.
- Difficulty of transfer of wealth.
- Difficulty in borrowing & lending
- Difficulty in capital formation.
- Difficulty in division of labor.
Difficulties of Barter System
- Lack of Double Coincidence of Wants:
The main disadvantages of barter system is the double coincidence of wants e.g. if a person has surplus amount of wheat and he want to exchange wheat with clothes then he will have to find a person who not only possesses clothes but also wishes to exchange clothes for wheat.
- Lack of Common Measure: –
In barter system there was no standard unit to measure value of different goods. So there was difficulty in valuation of goods. This lack of common measure makes trade more difficult. •
3 Indivisibility of Commodities: –
In barter system it is very difficulty to divide a commodity without losing it’s value e.g. if the owner of the cow wants to purchase a hen then it will not be possible for him to divide the cow and give a small portion of it to the owner of the hen in exchange of that hen.
- Difficulty in Storing Wealth: –
Under barter, wealth cannot be stored for a long period of time. It is difficulty to store goods, particularly perishable goods for a long time without losing its value.
5 Difficulty in Future Payments: –
Under barter system, it is very difficult to lend goods to other people. With the passage of time the value of goods may fall so it becomes difficult to make payment in future.
- Difficulty in Tax Collection: –
Another difficult}-, which arises under barter system, is that the tax cannot be collected in the form of goods. If the commodities are collected from the taxpayers, then it becomes difficult for government to store the wealth in the shape of goods.
- Difficulty of Transfer of Wealth: –
It is very difficult to transfer goods from one place to another, especially when they are in large quantity e.g. It is difficult for a person to transfer his one thousand cows from Multan to Lahore.
- Difficulty in Borrowing and Lending: –
In barter economy borrowing and lending of goods also become difficult e.g. a person lend some quantity of wheat during the period of famine. If the same quantity of wheat is returned during the time when wheat is in abundance naturally he will be a sufferer.
- Difficulty in Capital Formation: –
Another difficulty in barter system is that there is lack of capital formation the creation of capital goods is necessary for further production of goods services and barter is the enemy of capital goods.
- Difficulty in Division of Labor: –
In barter system it is difficulty to start large-scale production so production is done on small scale. Thus division of labor and specialization is not possible in small-scale production.
Removal of Difficulties with the Introduction of Money:
The use of money has removed all inconveniences of barter.
1 Removal of Double Coincidence of Wants Problem:
Money has eliminated the problem of double coincidence of wants because it serves as a medium of exchange. Goods are sold to get money and money is used to buy goods.
- Removal of Subdivision Problem: –
Money has also removed the problem of subdivision of good by acting as a medium of exchange.
- Base of Measuring Value:
Money servers as a common measure of value. The value of goods can be easily stated in money prices
- Convenient for Future Payments:-
Money makes future payments very convenient because when payments are stated in monetary units every thing becomes quite clear.
- Easy Storage of Wealth:-
Wealth can be easily stored in the form of money. So another disadvantage of barter system is removed with the invention of money.
- Helpful in Revenue Collection:-
The problem of revenue collection is removed with the help of money because revenue can be easily collected through money.
- Measure of Transferring Wealth:-
Wealth can be easily transferred from one place to another with the use of money.
- Establishment of financial Institutions:-
The introduction of money has made it possible to establish financial institutions like the Central Bank. Commercial Bank.
The inconveniences of barter system made this system simply impossible, to flourish in the modern economy. With the invention of money, these difficulties were removed and money played an extremely efficient role in the today’s progressive economy.