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Monday, 21 November 2011

What is barter system? what were the main difficulties of the barter system

BARTER SYSTEM :-
The direct exchange of one commodity or service for another without the use of money is termed "Barter" in economics. Barter system is that in which no money exist. In other words it is moneyless economy up to some extent it is still available in our villages. The village, Blacksmith and Carpenter usually receive his reward in terms of wheat from the farmers.
Barter is workable in backward as well as advanced countries. Now a days due to exchange difficulties some advanced countries are entering into a barter deal with other countries. Now this system has been given up by the civilized world due to the following reasons.

DEFECTS OF BARTER SYSTEM :-
Following are the main defects of this system :

1. Lack Of Double Coincidence Of Wants :-
The direct exchange of one commodity for an other requires direct satisfaction of both the parties. So the main disadvantage of this system is the lack of double coincidence of wants. For example one cow would be exchanged for four sheep. It is necessary that a person with the cow should find the man who wants to exchange sheep with the cow. So arranging for such an exchange would be very difficult.

2. Lack Of Common Standard Of Value :-
All the goods which are be exchanged are not of the same value, so it is very difficult to determine the ratio of exchange between the different goods.

3. Lack Of Subdivision :-
In case of goods which are indivisible the value loss will be suffered. For example, if the owner of a cow wants to purchase a hen then it will be not possible for him to give a small part of cow to the owner of a hen. In this case he will suffer a loss.

4. The Difficulty In Strong Wealth :-
It is very difficult to store goods particularly perishable goods for a long period. They loose their value as time passes.

5. Difficulty For Future Payments :-
Under this system it is very inconvenient to lend goods to other people. With the lapse of time the value of goods may fall. So one would like to suffer a loss.

6. Difficulties For Finance Minister :-
Under barter system, goods can not be collected as a tax, because these can not be kept in a store for a longer period.

7. Difficulties For Transfer Of Wealth :-
Under this system transfer of wealth also becomes a problem for the people. For example one person wants to take one thousand cow from Gujrat to Ahmadabad, how much difficulty he would feel?
Now by the use of money all these difficulties have been removed.

8. Lack Of Specialization :-
Under the barter system a high degree of specialization is not possible. A person cannot yet the skill of specialization the particular field as we find in the present system of production.


HOW THESE DIFFICULTIES CAN BE REMOVED ?
Money has removed the difficulties of barter system in the following ways :

1. Common Measure Of Value :-
now goods and services are purchased and sold with the help of money and it is used as a common measure of value. We can compare the price of various goods easily.

2. Solves The Future Payments Problem :-
Now it is very easy to sell the present goods on credit because we can easily fix the amount of future payment due to money.

3. Easy Transfer :-
Money can be easily transferred from one place to another. A man who have a money can easily purchase anything at any time.

4. Economic Development :-
With the use of money trade and industry has been expanded and process of economic development has been increased.

5. Balance In Demand And Supply :-
Prices play very important role in bringing the the demand equal to supply. As price of any commodity increases, producer increases the supply.

6. Importance For The Banks :-
Money is very important for establishing the financial institutions like banks which deals with the currency and other money assets like shares and bonds.

7. Flow Of Money :-
There is a circular flow of money and money flows from firms to the house holds and then again to firms.

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