Q.No1 Define Barter System? Discuss its main difficulties (inconvenience) and how money has removed these Difficulties\Problems?
Barter System
Introduction:
Barter is the system of trade that was prevailing in the economy before the invention of money. Under barter as there was no money so there was no medium of exchange. The commodities and goods were traded directly for each other. A person can trade the things , which he has got in surplus for the things, which he is in need of . However this system was very difficult and inconvenient due to which modern world gave up barter and started using money.
Definitions:
“Barter is the direct exchange of commodity or services for another without the use of money”
S.sloan
“ Barter is the form of trading in which goods are exchanged directly for other goods without the use money as an intermediately”
G.Thomas
“Barter is the direct exchange of goods and services without the use of money as either the means payment or a unit of account “
R.H. Parker
The direct exchange of surplus commodity for commodity with another person without the use of money is called barter system.
Simple words
Inconvenience of Barter System
1. Coincidence of wants:
In barter there was need of double coincidence of wants. This means that if you have got surplus sugar with you and you need a leather jacket. You will have to find a man who has surplus leather jackets and agrees to give jackets to you for sugar . This was the basic difficulty and inefficiency of barter system.
2. No Measure of Value:
Under barter there was no standard unit to measure value of different units or to do measure of different goods . So there were difficulties in valuation of goods . e.g. cow and goats .
3. No Subdivision:
In barter there was always a problem of lack of subdivision . As mostly goods and animals were traded for goods so it was nearly impossible to subdivide them (e.g., horses and pen ) into into smaller units for small transactions .
4. No Store of value :
Under the barter , wealth can`t be stored for a long period of time . Though people were in the habit of holding precious metals but other goods, which were perishable (like vegetables , fruits) could not be stored for any long time period .
5. Standard Of Deferred Payments:
Under barter there was no standard of deferred payments. There was no mechanism debts and payment in future with reasonable certainty and security.
6. No investment \ Saving:
Under the barter neither there was any investment or any saving . People were in habit of self-sufficiency and they were not able to save for rainy days or to invest what they got in surplus to earn healthy return.
7. Economic Measurement:
Under barter it was impossible to measure any economic variable both micro and macro. There was no system to measure personal income on micro level and GDP on macro level .
8. Comparison of living standard :
As under barter , wealth can`t be stated in common units , so it was impossible to compare living standard of different classes of society . Further it was also impossible to determine true worth of any stock or merchandise . there was no common unit to compare wealth distribution among people .
9. Tax Collection :
If there is no money , the Govt . will have to collect its taxes in form of goods and pay its employees in the same form . but how odd will it look that the state is receiving its share in and paying salaries in the form of fruits , milk, eggs , wheat , cloth etc.
10. Difficulties in transfer of wealth:
Under barter , transfer of wealth was very difficult if not impossible . Mostly people were in habit of holding wealth in form of animals and perishable goods and it was not an easy task to transfer these over long distances .
11. Specialization :
Specialization is essential for gaining competitive advantage over other . it leads to learning by doing that helps in the reduction of per unit costs . However in the barter system there are no incentives for specialization .
12. No budgeting :
Under barter there are no incentives for budgeting expenses and incomes . People are unable to forecast the worth of there merchandise with any reasonable certainty.
13. Capital formation :
Under the barter there are no incentives for savings and production of capital goods .People are usually concerned with current consumption needs and do not play any attention towards capital formation.
Summing Up:
These were the inconveniences of barter that made this system simply impossible to flourish in the modern economy . With the invention of money , these difficulties were removed and money played an extremely efficient role in the modern economy.
How use Money overcome Inconveniences of barter system
With the invention of money , the inconveniences of barter were removed completely. Money served as a medium of exchange system.
1.Medium of exchange :
Money serves as a common medium of exchange . it eradicates the inconvenience of “double coincidence of wants” now any one can buy and sell anything for money .
2.Store of value
By working as a store of value money removed the inconvenience of “ lack of store of value”.
Now wealth can be stored in form of bonds , share certificates etc. which are though not perishable yet open to hazards of inflations.
3. Price Mechanism:
Money established the price mechanism all over the world . By this it removed the inconvenience of “ no measure of value “.
4. Credit and Advances :
Money can be advanced at interest . thus money has removed the inconvenience of “ no standard of deferred payments” now loan can be taken from banks and financial institutions debts and long term payments can be stated in term of money.
5. Banking institutions :
Money has greatly helped in the establishment , working and development of all banking and monetary institutions. The whole banking structure is build on the basis of money.
6. investments and savings :
Money has made it possible and extremely easy to invest and save . Now we can save our wealth by investing it in saving schemes .
7. Public Finance /Government Revenues:
Money has greatly helped the accounting of public finance , tax revenue and government revenues etc . it has facilitated the govt. borrowings and spending .
8. Liquidity to international trade :
Money has provided the much needed liquidity , to international trade . Under barter it was not possible to trade effectively with foreign countries . There was no appropriate means of making foreign payments . Money however removes these difficulties.
9. Base of specialization :
Barter was characterized by the phenomena of self sufficiency which was inefficient . The invention of money led to specialization. Specialization not only helps in reducing cost of production but also results in higher production .
10. Foreign investment :
Money has made possible the huge foreign investment in today ‘s world . under barter investment was fairly impossible . but with the invention of money people devised different new modes of making investment.
11. Measurement of efficiency :
Under barter there was no standard of measuring efficiency and productivity. However the problem was solved by money . now we can measure output , cost and efficiency in definite monetary units and can take long term decisions on the basis of such measurements.
Summing Up;
It can be easily judged that there were many difficulties in the barter system of trade. The invention if money removed almost all these difficulties and showed the world a path of rapid economic activity and liberalization.
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