Question

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

(i) Lack of common measure of value.
(ii) Lack of standard of deferred payments.

Answer 1

(i) Lack of Common Measure of Value:

Even if the two persons who want each other’s goods meet by coincidence, the problem arises as to the proportion in which the two goods should be exchanged. The value of a commodity or service means the amount of other goods and services it can be exchanged for in the market. It would have to be expressed not just as one in terms of one commodity but in terms of many commodities and services in the market. If there were 1000 goods and services in the market then the value of each would have to be expressed in terms of 999 others.

There is no common measure of value, the rate of exchange will be arbitrarily fixed according to the intensity of demand for each other’s goods. Consequently, one party is at a disadvantage in terms of trade between the two goods.

(ii) Lack of Standard of Deferred (Future) Payments:

Another drawback of the barter system is that it lacks a standard of deferred payments. So credit transactions requiring future payments cannot take place smoothly under barter trading. For example, if a person borrows a cow for a year or two, he cannot return the same because, by that time, it would have become old, it may or may not be of the same quality as the original one.

There are three main problems in this context. These are :

• It may create controversy regarding the quality of goods or services to be repaid in the future.
• The two parties may be unable to agree on the specific good to be used for repayment.
• Both parties run the risk that the value of goods to be repaid may increase or decrease in the future.