Question

Bring out problems of Barter System.

Answer 1

1. Lack of Double Coincidence of Wants: One major drawback is the absence of double coincidence of wants. For an exchange to occur, both individuals must have what the other desires and be willing to trade. For example, someone wanting cloth in exchange for wheat must first locate another person who not only possesses cloth but also wants wheat. This process can be time-consuming, and in many cases, a suitable trading partner may not be found, preventing the exchange altogether.
2. Large Number of Intermediates: Secondly, barter can lead to numerous unnecessary and inefficient intermediate exchanges. In a complex and advanced economy, relying on barter is impractical. Consider trying to operate a university, a modern hospital, or an automobile factory purely through the exchange of goods and services; it would be chaotic and unmanageable.
3. Problem of Measurement of Value: Another major issue is the absence of a standard unit for measuring value. Just as a metre helps in measuring length uniformly, money provides a consistent measure for value, which barter lacks. In a barter system, the value of an item varies depending on what it’s being exchanged for. For instance, a chair might be worth 10 kg of sugar, while 2 metres of cloth might equal 5 litres of milk. Such comparisons become highly confusing and impractical, especially as the number of possible exchange ratios increases significantly.
4. No Degree of Specialisation: Specialisation leads to increased production, which naturally results in more exchange transactions. In a barter system, a lot of time and effort is wasted in figuring out the appropriate exchange rate between two goods. In contrast, the use of money simplifies transactions and greatly supports specialisation and trade.
5. Book-keeping becomes Difficult: Maintaining financial records becomes extremely complicated, if not almost unmanageable, under the barter system. A balance sheet would have to include a wide variety of goods and their respective quantities that a person owns or owes. As a result, preparing accurate profit and loss statements would be highly challenging.
6. Problem of Future Payments: Agreements involving future payments become problematic in a barter system. Contracts that involve paying wages or interest at a later date are hard to enforce because there's uncertainty about which commodity will be used for repayment. The value of the chosen good may fluctuate significantly, leading to potential losses for either the lender or the borrower and resulting in disputes over the mode of repayment.
7. Borrowing and Lending: The barter system makes borrowing and lending quite problematic. For instance, if someone borrows 100 cows, returning the same number might lead to serious disputes. The borrower might repay with old, sick cows, while the original loan consisted of young, healthy, milk-producing ones. Such issues highlight how unreliable and challenging lending and repayment can be without a standard measure of value.
8. Difficulty in Store-value: Storing wealth in the form of goods is highly inconvenient. Most goods eventually deteriorate, and keeping them in usable condition can be expensive. Additionally, they may not be easy to sell quickly without incurring a loss or compromising the ability to purchase other needed items. In some cases, ongoing expenses are required just to preserve their value.
9. Lack of General Purchasing Power: The barter system lacks a universal medium of exchange, something that is widely accepted for buying goods and services or settling debts. There is no common standard with general purchasing power that facilitates smooth and efficient transactions.
10. Indivisibility of Certain Commodities: In the barter system, small transactions were often impractical because certain items couldn’t be divided. For example, if someone wanted to trade a cow for just a quintal of rice, they couldn’t break the cow into parts to match the value of the rice. In such cases, making an exchange becomes unfeasible.