Question

Enumerate any two difficulties faced under the barter system of exchange.

Explain any two problems of barter system of exchange. 

Briefly explain the following with reference to the barter system of exchange.

1. Lack of common measure of value.
2. Lack of standard of deferred payments.

Enumerate various difficulties faced under the barter system of exchange.

Answer 1

Problems of the Barter System of Exchange:

1. Lack of common measure of value: Under barter exchange, there is a lack of common measure of value. For example, if there are 1,000 goods in the market, then the value of each would have to be expressed in terms of 999 goods. The price list then becomes extremely complicated. Not only this, but no proper accounting is possible without a common unit of value.
2. Lack of standard of deferred payments: The barter system lacks a standard of deferred payments. In the absence of money, future payments are not possible because of the following reasons:
   1. The borrower may not be able to arrange exactly the same good and of the same quality at the time of repayment.
   2. There could be disagreement regarding which specific commodity would be used for repayment.
   3. There exists a risk since the value of a commodity may increase or decrease at the time of repayment.
3. Double coincidence of wants: Due to the absence of a commonly accepted medium of exchange, people faced the problem of double coincidence of wants in the barter system. For goods to be exchanged, both parties had to specifically want what the other person was offering. This meant that exchange was only possible when the needs of both the buyer and seller matched exactly.
4. Lack of Divisibility: Another difficulty of the barter system relates to the fact that all goods cannot be divided and subdivided. In the absence of a common medium of exchange, a problem arises when a big indivisible commodity is to be exchanged for a smaller commodity. For example, if the price of a horse is equal to five sheep, then a person having one sheep cannot exchange it for the horse because it is not possible to divide the horse into small pieces.
5. Problem of Storing Wealth: Under barter system, it is difficult to store value. In the absence of money, the individuals have to store wealth in the form of goods like horses, shoes, wheat, rice, etc. The value of stored commodities may change in the due course of time. These goods may perish after some time. Secondly, it is very expensive to store specific goods for a long time.