Barter System

1st year POE - Principles of Economics Notes

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Barter System

* Introduction

* Defects of Barter System

* How Money Removed The Difficulties of Barter


Introduction

Barter economy means the exchange of commodities. It consists if a bargain of commodity with the other with out the help of another of exchange, such as money. Therefore we can say that buying goods against goods is called barter system.
The barter system can easily be understood with the help of the following example. Suppose Mr. A is a farmer and produces wheat in his fields. When the crop is ready A finds that he can stock as much wheat as his family need for the whole year and still he will have a surplus which he can use for exchange purpose. Now he has to get his plough repaired through a carpenter. After availing the services of the carpenter, Mr. A makes him the payment in the form of wheat in exchange of his services. Again Mr. A wants to purchase cloth and goes to merchant’s shop. Here he exchanges the desired quantity of cloth with surplus wheat. Thus the process will keep on continuing and the needs and wants will be satisfied by making use of any commodity as the medium of exchange.

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Difficulties of Barter System

Following are some of the difficulties of the barter system.
1. Double Coincidence of Wants

Barter requires a double coincidence of wants. If a person for insistence has wheat and wants to exchange it with cotton, he has to find a person possessing cotton and requiring wheat. It was possible only when the people lived in small areas and their wants were too limited.
2. Lack of Common Measures

There was no fixed measure in which two things could be exchanged. It means every one did not derive complete satisfaction out of his deal. The ratios of exchange were fixed accordingly to the necessities and demands of the parties. One party had to suffer under these conditions were each transaction is an isolated transaction.
3. Lack of Divisibility

Another great disadvantage of barter system was the lack of divisibility. Suppose a man possess horse and requires wheat and cotton in exchange but both of these commodities may not be obtained from one man. One person may have wheat another has rice in surplus and both of them want to exchange their commodities with the horse. Now the horse cannot be divided and fence the transaction may not be completed.
4. Lack of Store of Value

Under the barter system wealth consisted of non-durable goods, which are quickly perished or detoriated with the passage of time. There value may not be stored for long period. Hence no body could think of storing something to provide against future.
5. Inconvenient Media of Exchange

Commodities like little wheat or other things alike cannot be easily transported and thus have little value. Therefore under barter system the mediums of exchange were really inconvenient.

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How Money Removed The Difficulties of Barter

With the help of money it has now become possible to over come the inconveniences of barter system.
1. Standard of Value

Under the system of exchange i.e. sales and purchase the value of each commodity is expressed in terms of standard of value such as gold or silver.
2. No need of Double Coincidence

Under monitory economy there is no such need of such two persons whose surplus suits with each other wants.
3. Sub-Division of Articles is Not Necessary

Money has solved the difficult of sub-divisibility of some of the commodities with out any loss. Under this system if any one needs urgent cash and has some valuable he can simply sell it in the market and get the desired money.
4. Store of Value

Money has provided man an opportunity to save money in the form of liquid cash that helps him to preserve his assets for a longer period of time and avoid any unseen stringencies.
5. Large-scale Production

Large scale of production is possible by the use of money, which was not possible under barter economy.
Summing Up

Thus money or sale and purchase system has removed all the difficulties of barter economy.

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