What is Barter System and its Difficulties

Barter System and its Difficulties

 

Introduction

 

A system of direct exchange of one commodity r service for another without the use of money is called barter. One has to exchange the product which one has in excess with those who have other surplus product with themselves.

 

Definitions

 

By R.H.Parker

 

Barter is the direct exchange of goods and services with out the use of money as either a means of paym nt or a unit of account.

 

By Sloan

 

Direct exchange of commodity or services for another without use of money

 

By G.Thomas

 

Barter is a form of trading in which goods are exchanges directly for other goods without the use of money as an intermediary.

 

Inconveniences of Barter system

 

1. Lack of double coincidence of wants

The basic problem in barter system is double coincidence of ants. It means that there must be double satisfaction of wants.

Both parties in barter. For instance, goods can be exchange effectively if a person is able to spare what the other person wants and at the same time needs what the other can spare.

 

 

2. Lack of common measure

 

In barter system, there is no common measurement for exchangeable goods. For instance, if a person have cow and other have goat, and 1st want to exchange cow after receiving two goats, and other is not agree from 1st because there is no common measurement of goods.

 

 

3. Lack of sub-division

 

As there are some commodities which cannot be sub divided. Like a person have a horse and other want to 20 Kg Rice. So in this situation which part of horse should be given in exchange for 20 Kg. of Rice?

 

4. Lack of store value

 

In barter system there is no facility of store value. Because there were some goods that have no storage facility. Like vegetables, fruits, etc

 

 

5. Lack of capital formation

 

The formation of capital goods is necessary for further production of goods and services. Bart r is the enemy of capital formation. The basis of capital formation is saving. In the absence of capital formation the economic progress become zero.

 

 

6. Difficulties in tax collection

 

In barter tax collected by revenue department in the form commodities. The goods collected form tax payer will not be stored for a longer period. They will lose their value with the passage of time.

 

7. Difficulties in transfer of wealth

 

There is great difficulty in transferring wealth from one place to another under barter. More ever immovable property can not be transferred.

 

 

8. No budgeting

 

Under barter it was not possible to budget expense and incomes. People were unable to forecasting the worth of their mechanism and merchandise. They therefore can not make any estimate of their future incomes and revenues.

 

9. No investment no saving

 

Under barter there is no concept of investment and saving. Because we can not express our income in any monetary unit.

 

10. Difficulty in future payment

In barter there is no concept of credit. And have no facility of future payment, because lack of monetary unit.

 

Removal of inconvenient of Barter

 

1. Money as a medium of exchange

 

The goods and services are now purchased and sold with the help of money. The difficulty of double coincidence of want has been removed.

 

 

2. Money as a common measure of value

 

Money is used as a common measure of value, by which we can measure and compare the values of different goods and services.

 

 

3. Money as a standard of future payment

 

A modern economy, goods and services are sold and bought on the promise to pay in future. So it acts as the standard of future payment.

 

 

4. Money as store value

 

Under barter system goods animals and commodities cannot be stored for a longer period. Now a day’s wealth is stored in the form of money.

 

 

5. Money is an instrument of making loans.

 

People save money a d deposit to businessmen and industrialists so savings are transferred to investment.

 

6. Liquidity to wealth

 

Money imports liquidity to various forms of wealth such as land, machinery, stocks, and stores etc, these forms of wealth can easily be converted into money.

 

 

7. Establishment of financial institutions

 

The introduction of money has made it possible to establish financial institutions like the central bank, commercial bank etc hich deal in currency and near money assets such as bills of exchange, bonds, shares, etc

 

8. Tax collection

 

The collection of tax was practically impossible in barter economy money solved this problem. Due to the introduction of money, the tax system is working quite successfully.

 

 

9. Development of banking system

 

Money is an integral part of baking system. Without money the concept of banking system seems t be meaningless. The barter system gives no idea of banking.

 

 

10. Money and problem of sub-division

 

The problem of sub-division was also solved by the use of money. Now with the help of money we can purchase each and every kind of goods.

 

 

Conclusion

 

No doubt money have remove the all the problem of barter system but still in developing countries like Pakistan, china use the barter system.

 

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