Barter System
1st year POE - Principles of Economics Notes
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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