Question

What are the drawbacks of the barter system?

Answer 1

The various drawbacks of the barter system are as follows:

1. Problem of double coincidence of wants: Double coincidence of wants implies that the needs of two individuals should complement each other for the exchange to take place. For example, in the above case, the second person must need rice in exchange for tea.
2. Lack of common unit of value: Under the barter system there was no common unit for measuring the value of one good in terms of the other good for the purpose of exchange. For example, a horse cannot be measured in terms of rice in the case of exchange between rice and horse.
3. Difficulty in wealth storage: It was very difficult to store commodities for future exchange purposes. The perishable goods like grains, milk and meat could not be stored to exchange goods in the future. Therefore, wealth storage was a major difficulty of the batter system.
4. Lack of standard of deferred payments: The future payments could not be met in a C-C economy (barter system), as wealth could not be stored. It was very difficult to pay back loans.
5. Lack of Divisibility of Goods: Many assets or goods cannot be divided into smaller parts without losing their entire utility or value. For instance, if a person wants to buy a small sack of wheat with a horse, they cannot chop the horse in half to match the exact value of the wheat.