What is Barter System?


More money was invented, the primitive world’s trade was carried out according to the barter
system of exchange.

Meaning of Barter Exchange

In the beginning of civilization, human needs were simple and limited. People used to exchange
axds with each other to satisfy their wants. Barter Exchange refers to exchange of goods for
An economy, there there is a direct barter of goods and services, is called a Barter
Economy or C-C Economy’ (there C stands for commodity).
For ample, when a farmer gives wheat and gets cloth from the weaver in return, it is known
barter exchange.

Barter System can work when there exists ‘Double Coincidence of Wants’.

Double Coincidence of Wants refers to the simultaneous fulfillment of mutual tants of buyers and sellers
the above example, want for clothing by the farmer coincides with the want of weaver for
wheat However,it is very difficult to find double coincidence of wants in real life. It leads to
uge ‘Trading Costs’.
with rise in economic activities, the exchange through barter became more difficult and
complicated. Let us discuss the various limitations of Barter Exchange.

Limitations of Barter Exchange

The major limitations of Barter Exchange are:
1 Lack of Double Coincidence of Wants: Barter system can work only when both he
and seller are ready to exchange each other’s goods. For example, A can exchange on
with B only when A has what B wants and B has what A wants. However, such do
coincidence is very rare.
2. Lack of Common Measure of Value: In the barter system, all commodities are not of allvalue and there is no common measure (unit) of value of goods and services, in whis
exchange ratios can be expressed. For example if A has wheat and B has rice, then it
difficult to decide, how much wheat is needed to exchange with one kilogram of rice.
the absence of common measure, the exchange ratio is fixed randomly, in which one
the party generally suffers.
3. Lack of Standard of Deferred Payment: Under barter system, contracts involving future
payments or credit transactions cannot take place with ease because of following reasons
a) The borrower may not be able to arrange goods of exactly same quality at the time
of repayment
(b) There may be conflicts regarding which specific commodity is to be used for
The commodity, to be repaid, may lose or gain its value at the time of repayment
So, it is very difficult to make deferred payments in the form of goods
4. Lad of Store of Value: Under barter system, it is difficult for people to store wealth for
future use because:La Most of the goods (like wheat, rice, vegetables, etc.) do not possess durability,
their quality deteriorates with passage of time.
(b) Storage of goods requires time and efforts.
As a result, goods cannot be used to store the earnings for a long period.With so many difficulties, barter exchange could not continue for a long time. As a result
was replaced by monetary exchange, i.e. buying and selling of goods with the help of Money.

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