Barter System Definition & Disadvantages of Barter System

Fri, 07/05/2013 - 11:57 -- Umar Farooq

What is Barter System

Money is a significant medium used as a payment for commodities. It facilitates the exchange and production of output. It is also accepted for repayment of debts. It can perform a number of functions such as a medium of exchange, a unit of account, a store of value and a standard of deferred payments.

Definition of Barter System

A system in which goods and services are directly exchanged for other goods without the use of money is called barter system. In other words it is the direct exchange of goods for goods. According to Prof Standy, barter economy is such an economy in which there is no use of a generally acceptable medium of exchange. Before the emergence of money the this system was in practice. Now-a-days it is not completely eliminated from the economy however its use has become limited. Even in modern times during monetary crisis, or hyperinflation, thesystem has replaced the use of Money.

Disadvantages of Barter System

Despite its usefulness there are certain disadvantages of barter system which are outlined below

Lack of Double Coincidence of Wants

For a successful transaction of goods, satisfaction of both the parties is must. It means that a person having some good and looking for its exchange with the other good must get that. For example a person has a piece of cloth and he wants to exchange it with wheat, first of all he will have to search for such a person who possesses it and secondly he is willing for exchange. This exercise usually takes a long time and consumes energy therefore the this system did not succeed.

Lack of Common Measure of Value

The second important drawback is the lack of common measure of value. If two persons come across each other to willingly exchange their goods, then what will be the common yardstick to measure the value of different goods for the purpose of exchange? For example if one person has meat and the other has fruit, then how would this exchange take place as both these goods are measured in different units. Furthermore for every new transaction the determination of value will be required afresh.

Indivisibility of Goods

In this system sometimes indivisibility of certain goods becomes a problem due to which exchange of different goods do not take place. For example a person having cycle and he wants to avail some cloth, oil and rice. Now how would he distribute his cycle to avail different units of different commodities? As a matter of fact the cycle in parts is of no value for those who possess the cloth, oil and rice.

Lack of Store of Value

It means people cannot store the value of goods because majority of goods when stored are either worn out or become less useful. For example wheat, rice, sugar, etc. cannot be stored for a long time. However in the case of money the value of any kind of good can be stored.

Inconvenience in Lending and Borrowing

In the system due to the time lapse, the value of goods may decrease which affect those who generally lend because at the time when they lend the goods may be of high value but it is quite possible when the goods are returned after some time, it may not have the value as it had before. For example at the time of scarcity, a person borrows some wheat from another person and returns it back after some time when it is abundant. Here the lender suffers because at the time of lending the value of wheat was so high while at the time of return the value is decreased.

Transfer of Wealth

Under the direct exchange, it is difficult to transfer certain goods from one place to another which in the case of money is quite easy. A person having a house cannot shift it from one place to another while he can transfer its value in the form of money.

Inconvenience in Government Receipts and Payments

Under the barter system it is extremely difficult for a government to collect taxes because there are certain issues like types of taxes, different goods, collection and storage problems, similarly payment to government servants in the form of goods would also be extremely difficult.