What is a
barter system? What are its drawbacks?
What is a barter system? What are its drawbacks?
Barter
system is a system that was used in ancient times to exchange goods.
In other words, this system was used to exchange one commodity for
another before the monetary system came into existence. For example,
if a person having rice wants tea, then he can exchange rice with a
person who has tea and needs rice. The economy having the barter
system was called ‘C-C economy’,
i.e. commodity is exchanged for commodity.
The
various drawbacks of the barter system are as follows:
1.
Problem of double coincidence of wants
Double
coincidence of wants implies that needs of two
individuals should complement each other for the exchange to take
place. For example, in the above case, the second person must need
rice in exchange of tea.
2. Lack
of common unit of value
Under
barter system there was no common unit for measuring the value of one
good in terms of the other good for the purpose of exchange. For
example, a horse cannot be measured in terms of rice in the case of
exchange between rice and horse.
3.
Difficulty in wealth storage
It was
very difficult to store commodities for future exchange purposes. The
perishable goods like grains, milk and meat could not be stored to
exchange goods in future. Therefore, wealth
storage was a major difficulty of batter system.
4. Lack
of standard of deferred payments
The future
payments could not be met in a C-C economy (barter system) as wealth
could not be stored. It was very difficult to pay back loans.
Barter system is a system that was used in ancient times to exchange goods. In other words, this system was used to exchange one commodity for another before the monetary system came into existence. For example, if a person having rice wants tea, then he can exchange rice with a person who has tea and needs rice. The economy having the barter system was called ‘C-C economy’, i.e. commodity is exchanged for commodity.
The various drawbacks of the barter system are as follows:
1. Problem of double coincidence of wants
Double coincidence of wants implies that needs of two individuals should complement each other for the exchange to take place. For example, in the above case, the second person must need rice in exchange of tea.
2. Lack of common unit of value
Under barter system there was no common unit for measuring the value of one good in terms of the other good for the purpose of exchange. For example, a horse cannot be measured in terms of rice in the case of exchange between rice and horse.
3. Difficulty in wealth storage
It was very difficult to store commodities for future exchange purposes. The perishable goods like grains, milk and meat could not be stored to exchange goods in future. Therefore, wealth storage was a major difficulty of batter system.
4. Lack of standard of deferred payments
The future payments could not be met in a C-C economy (barter system) as wealth could not be stored. It was very difficult to pay back loans.
