Barter is the direct exchange of goods for goods and services for services without using money as a medium of exchange.
Barter trade comes with its inherent difficulties or inconveniences, which we will be looking at in his post.
Let's get started.
1. Lack of double coincidence of wants: Barter trade requires both parties must possess goods or services that the other party wants, and both parties must be willing to trade those goods or services. This is referred to as a double coincidence of wants.
The smooth functioning of the barter system requires a double coincidence of wants on the part of those who want to exchange goods or services.
That is, the person who wishes to trade his good or service needs to find some other person who is not only willing to buy his good or service but also possesses that good that the former wants.
For example, if a person wants to trade a bag of rice for a bag of beans, they must find someone who has a bag of beans and wants a bag of rice.
If the person with the bag of beans does not want a bag of rice, or if the person with the bag of rice does not want a bag of beans, then the barter trade cannot take place.
The existence of such a double coincidence of wants is a remote probability as there is only a small chance that the condition of double coincidence of wants will be met.
Because of the issue of double coincidence of wants, barter trade is a very laborious and time-consuming process.
2. Lack of a common measure of value: In a batter system, there is a lack of a common unit in which the value of goods and services can be measured.
Even when the condition of double coincidence wants is met, the problem of a common measure of value arises as to the proportion in which the two goods should be exchanged to ensure fair trade.
For example, if two persons want to trade a bag of rice for a bag of beans, they may not agree on the value of the rice and beans each other.
The person with the bag of rice may believe that the rice is worth more than the beans, while the person with the beans may believe that the beans are worth more than the rice.
Without a common measure of value, it is difficult for both parties to agree on fair trade.
Therefore, the lack of a common measure of value makes it extremely difficult for people to determine the value of their goods and exchange them one for another.
3. Difficulty in sub-division: Barter is possible when goods can be divided and subdivided for exchange purposes.
However, it is difficult to divide commodities like goats, horses, and cows, without destroying their values.
For example, a person may have desired a horse and the other a sheep and both may be willing to trade.
The former may demand more than four sheep for a horse, which is equivalent to giving 1 sheep for a quarter of a horse.
The former may demand more than four sheep for a horse, which is equivalent to giving 1 sheep for a quarter of a horse.
However, since it is not possible to divide the horse without killing the horse, no trade will be possible between the two persons.
4. Difficulty in storing wealth: It is difficult to store value in the barter system.
Anyone wanting to store value in the goods being used as a form of exchange would be faced with the difficulty that during the intervening period, the stored commodity may get spoilt or become obsolete.
For example, agricultural products are perishable and cannot be stored for long periods because they will get spoilt.
Even non-perishable goods may deteriorate or lose value over time, making it difficult to maintain their value.
5. Difficulty in making deferred payments: In a barter economy, it is very difficult to make payments in the future.
This is because there are no debt contracts as there is no medium of exchange (like money) that can be used to facilitate deferred payments.
Instead, goods and services are traded directly for other goods and services.
In a barter system, debt contracts are not possible due to disagreements on the part of the two parties on the following grounds:
- It would often invite controversy as to the quality of the goods or services to be repaid. For example, if one party agrees to repay another party with a certain quantity of wheat, there can be disagreement on the quality of the wheat that will be repaid. One party might believe that the wheat repaid is of a higher quality or lower quality than the one agreed to be repaid.
- The two parties would often be unable to agree on the specific commodity to be used for repayment.
- Both parties face the risk that the commodity to be repaid would increase or decrease seriously in value during the period of deferment. For example, if one party agrees to repay another party with wheat, the value of wheat might increase in terms of other commodities, which would be to the debtor's regret or the value of wheat might decrease markedly in value, to the creditor's regret.
Therefore, because it is impossible to make just payments involving future contracts under the barter system, deferred payments are not allowed in barter trade
Money- A Removal of the Barter Problem
The use of money has solved the problem of the double coincidence of wants that are associated with barter trade.
Money allows two parties who do not want each other's goods to transact.
Money also eliminates the inconvenience of a lack of a common measure of units associated with barter trade.
Money serves as a common measure of value. All goods and services can be valued in terms of money, i.e. price.
Additionally, money has overcome the difficulty of subdivisions because paper money of small denominations can be used for the exchange of goods of small value.
Further, since the value of money remains relatively stable, wealth can be stored in the form of money without losing value, removing the problem of storing wealth in the barter system.
Finally, money has solved the problem of deferred payment by allowing us to buy goods now and pay for them later with the money.