Direct exchange of goods against goods without use of money is called barter exchange.’
The system of exchange where goods or services are directly exchanged for other goods or services without saying a medium of exchange, such as money is known as the Barter system. This system existed in olden times.In the olden times, people lived in a village life and has less needs.They carried out agricultural exchange and exchange of goods and service which was sufficient for their livelihood.
Problems of Barter Exchange:
1. Lack of double coincidence of wants:
Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person wants to buy and sell. ‘Simultaneous fulfillment of mutual wants by buyers and sellers’ is known as double coincidence of wants.
2. Lack of common measure of value:
In barter, there is no common measure (unit) of value. Even if buyer and seller of each other commodity happen to meet, the problem arises in what proportion the two goods are to be exchanged. Each article must have as many different values as there are other articles for which it is to be exchanged.
When thousands of articles are produced and exchanged, there will be unlimited number of exchange ratios. Absence of a common denominator in order to express exchange ratios creates many difficulties. Money obviates these difficulties and acts as a convenient unit of value and account.
3. Lack of standard of deferred payment:
There is problem of borrowing and lending. It is difficult to engage in contracts which involve future payments due to lack of any satisfactory unit. As a result, future payments are to be stated in term of specific goods or services. But there could be disagreement about the quality of the good, specific type of the good and change in the value of the good.
4. Difficulty in storing wealth (or generalised purchasing power):
It is difficult for the people to store wealth or generalised purchasing power for future use in the form of goods like cattle, wheat, potatoes, etc. Holding of stocks of such goods involves costly storage and deterioration.
5. Indivisibility of goods:
How to exchange goods of unequal value? If a household wants to sell his cow and get in exchange cloth equal to the value of half of his cow, he cannot do so without killing his cow. Thus, lack of divisibility of goods makes barter exchange impossible.
In order to overcome the above disadvantages of the barter system, money was invented by the society.
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