Question

What is a barter system? What are its drawbacks?

Answer 1

Barter system was used in ancient times for the exchange goods. It was a system where one commodity, product or some goods was exchanged for another. For instance, if a person has 1 kg of sugar and he wants to have 1 kg of jaggery in exchange for that, he can exchange the same if there is someone who is willing to exchange jaggery for sugar. This process was called a commodity for commodity exchange. Further, it was replaced by the monetary system.

Drawbacks of Barter System

• In a large economy, Barter exchanges are not feasible.
• Under the barter system, it is not feasible to carry forward one’s wealth.
• In a search for a person to exchange their surplus, in a barter system, a person would end up incurring very high costs.
• Taking into consideration the same example of rice, these are perishable goods, one cannot save it like money, moreover money is not perishable.
• For example, if a person is looking to barter surplus rice, then a lot of resources and time would be spent on finding the person who would be willing to exchange goods that you need.
• Moreover storing rice also would require a lot of space, if there are space constraints then it would be a problem.

Advantages of Using Money Instead of Barter System

• Any commodity can be exchanged at any point of time using money.
• People hold on to money with 2 main objectives – that is transaction motive and speculative motive.
• If money is invested in some financial instruments, you can earn more money, which is not possible in barter exchange.
• If you save money in a bank, you can earn interest on the same, whereas in the barter system there is no such.
• Money is universally accepted.
• There are no constraints like shortage of space, while storing money.