BARTER SYSTEM......

Inconveniences of Barter System;

Before the introduction of money, the following difficulties and inconveniences we

experienced in the barter system.

Double CojncWence of Wants/The direct exchange.pf one commodity for anoth

requires direct satisfaction of both the parties in the'bargain^ The exchange can or

be effective if a person is able to spare what the other person wants and at the san

time needs what the other can sparer For instance, a person has surplus wheat wi

him and wishes to exchange it with cloth He will have to find a person who not or

possesses sufficient cloth but also desires wheat. This double coincidence, as

obvious, is very difficult to attain in this civilised world especiallywhere the range

human wants is very wide The transactions cost of double coincidence of wants a

very high

Lack of Common Measure. Another difficulty which arises under the system

Darter is the absence of common measure which can help in the estimation

relative values of the two commodities/ For instance, a man has a horse with him ar

the other a cow and both are willing to trade. A man who has a horse assigns th

value of one horse as two cows. The other who has a cow desigris the value of or

cow as one horse and both stick to their respective valuations/In the absence

common measure of value, the exchange between the two parties cannot take plac

' unless both of them assign the same value to different commodities which th(

3. Lack of Sub-divisions. One serious drawback of barter is that even when doub

coincidence of wants exists' between the two parties, the exchange may not tat"

place even then. This is particularly the case in those commodities which cannot t

sub-divided/ For instance, a person has a cow with him and he wishes to get 40 kik

of wheat It is clear that the value of the cow is much more than the value of 40 kik of wheat. What part of the cow should be given in exchange for 40 kilos of wheat? Just imagine, if the cow is cut into pieces, what value can it command?

Lack of Store of value. Another serious inconvenience which arises under barter is

that the goods particularly perishable ones cannot be stored for a longer period. They

lose their value as time passes on.

Specialization not possible. Under the barter economy each person is a jacK of all

trades and master of none. A high degree of specialization cannot be achieved under

it.

Payments in the future. Under the system of barter, it is very inconvenient to lend

goods to other people. With the lapse of time, the value of the commodities may fall.

So it becomes difficult to make payments in the future.

Difficulties of Transfer of Wealth. There is great difficulty in transferring wealth

from one place to another under barter. For instance, if a person has to take one

hundred heads of cattle from Faisalabad to Karachi, how much difficult would he

feel? The risk and inconvenience of transportation is a major difficulty of barter

system.

Difficulties in tax collection. Another difficulty which arises under barter system is

that the tax cannot be collected in the form of goods, If the commodities are collected

from the tax payers, they will not only lose value as time passes on but are difficult to

store also.

The inconveniences of barter account for the emergency of money With the introduction of money, the difficulties of double coincidence of wants, the inconveniences of tack of division, the drawbacks of store of value etc.. etc., have been removed to a great extent.

How money has removed the difficulties of barter system?

The use of money has converted a barter economy into a monetary economy. The money has over come the difficulties of barter system in the following ways.

Use of money. Money is used now as a (i) Medium of exchange. The goods and

services are now purchased and sold with the help of money The difficulty of double

coincidence of demand has been removed with the help of money, (ii) Money now

serves as a common measure of value. The problem of comparing the prices of

goods and services in the market is now simplified, fiii) With the help of money, the

exchange of present goods on credit has been made easier. The problem of

deferred payments has been satisfactorily solved with the help of money, (iv) Money

as a liquid store of value has facilitated its possessor to purchase any other asset at

any time, (v) Through money value can be easily and quickly transferred from one

place to another.

Liquidity to wealth. Money imparts liquidity to various forms of wealth such as land,

machinery, stocks stores etc. These forms of wealth can be easily converted into

money.

Establishment of financial institutions. The introduction of money has made it

possible to establish financial institutions like the central bank, commercial banks etc

which deal in currency and near money assets such as bills of exchange, bond,

shares etc.