BARTER EXCHANGE

INTRODUCTION:

This chapter is a detailed version of barter system and its difficulties, how money has overcome its drawbacks, money supply and its measures.

BARTER SYSTEM & ITS DIFFICULTIES

Barter system 

Definition: Barter system refers to exchange of goods for goods. An economy, where there is a direct barter of goods and services, is called a barter economy.

For example, wheat may be exchanged for cloth; house for horses, etc., or a teacher may be paid wheat or rice as a payment for his/her services.

Such exchange exists in the C-C Economy (commodity-to-commodity exchange economy).

Note: In C-C Economy C stands for commodity. C-C economy is the one in which commodities are exchanged for commodities. C-C exchange refers to barter system of exchange. Hence, C-C Economy is an economy dominated by barter system of exchange

Limitations of Barter Exchange:

Lack of double coincidence of wants:

• Barter is possible only if goods produced by two persons are needed by each other, thus it is double coincidence of wants.
• Double coincidence of wants means that goods in possession of two different persons must be useful and needed by each other. It is the basis of barter system, however it is rare for this to happen.
• It is difficult to find such a person every time. In barter system, exchange becomes quite limited.

Lack of store of value:

• It is very difficult to store wealth for future use.
• Most of the goods like wheat, rice, cattle etc. are likely to deteriorate with the passage of time or involve heavy cost of storage.
• Further, the transfer of goods from one place to another place involves huge transport cost.
• Transfer of immovable commodities (such as house, farm, land, etc.) becomes almost impossible.

Absence of common measure of value:

Different commodities are of different values. The value of a good or service means the amount of other goods and services it can be exchanged for in the market. There is no common measure of value under barter system.

In this situation, it is difficult to decide in what proportions are the two goods to be exchanged.

Lack of standard of deferred payment:

• In a barter economy, future payments would have to be stated in terms of specific goods or services. This leads to following problems:
• There could be disagreement regarding the quality of the goods or services to be repaid.
• There would be disagreement regarding which specific commodities would be used for repayment.

Money has overcome the drawbacks of barter system in the following ways:

Barter system makes the exchange process very difficult and highly inefficient.

(a) Medium of exchange

• Under barter system, there is lack of double coincidence of wants.
• With money as a medium exchange individuals can exchange their goods and services for money and then use this money to buy other goods and services according to their needs and conveniences.
• A buyer can buy goods through money and a seller can sell goods for money.

(b) Measure of Value

• Under barter system, there was no common measure of value. Money has also solved this difficulty.
• As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.” Money measures the value of economic goods.
• Money works as a common denominator into which the values of all goods and services are expressed.
• When we express the values of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them.

(c) Store of value

• Under barter system, it is very difficult to store wealth for future use.
• Most of the goods are perishable and their storage requires huge space and transportation cost.
• Wealth can be conveniently stored in the form of money.
• Money can be stored without loss in value.
• Money can easily be stored for future use.

(d) Standard of deferred payments

• Under barter system, transactions on deferred payments are not possible.
• With money, the debtors make a promise that they will make payments on some future dates. In these situations, money acts as a standard of deferred payments.
• It has become possible because money has general acceptability, its value is stable, and it is durable and homogeneous.