Question

What is meant by the barter system?

Answer 1

Barter is an alternative method of trading where goods and services are exchanged directly for one another without using money as an intermediary. It is an old method of exchange. People exchanged services and goods for other services and goods in return.

Barter System – Difficulties

• In a large economy, Barter exchanges are not feasible.
• In a search for a person to exchange their surplus, in a barter system, a person would end up incurring very high costs.
• Under the barter system, it is not feasible to carry forward one’s wealth.
• 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.
• Taking into consideration the same example of rice, these are perishable goods, one cannot save it like money, moreover money is not perishable.

Demand for Money

• Money is universally accepted.
• Any commodity can be exchanged at any point of time using money.
• There are no constraints like shortage of space, while storing money.
• 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 barter system there is no such.
• People hold on to money with 2 main objectives – that is transaction motive and speculative motive.