Friday, August 21, 2009
Inconveniences of Barter System
Barter means direct exchange of goods for good. Barter system was prevalent at an early stage of man’s economic life when the wants were limited in number. Man could easily satisfy all his wants he produced himself. But as time passed his needs began to increase. He lost the self sufficiency. He began to produce some goods in greater quantity than he could consume himself. The purpose was to exchange some of his products which he had in excess with those who had surplus products with themselves. For instance if a fisherman wanted to have skins, he could get them by giving fish to the hunter. Similarly if a weaver wanted a pair of shoes, he could receive that by giving surplus cloth to cobbler. This divert exchange of surplus commodity with another person without the use of money is termed as Barter in Economics.
INCONVENIENCES OF BARTER SYSTEM
The following difficulties and inconveniences were experienced in the Barter System.
1. Double Coincidence of Wants: The direct exchange of one commodity for another required direct satisfaction of both the parties in the bargain. The exchange can only be effective if a person is able to spare what the other person wants and at the same time needs what the other can spare. For instance a person has surplus wheat with him and wished to exchange with cloth. He will have to find a person who not only possesses sufficient cloth but also desires wheat. This double coincidence as in obvious is very difficult to attain in this civilized world especially where the range of human wants is very wide. The transactions of cost double coincidence of wants are very high.
2. Lack of Common Measure: Another difficulty which arises under the Barter system is absence of common measure which can help in the estimation of relative values of the two commodities. For instance a man has horse with him and other a cow and tooth are willing to trade. A man who has a horse assigns the value of one horse as two cows. The other who has a cow assigns the value of one cow as one horse and both stick to their respective valuations. In the absence of common measure of value the exchange between the two parties cannot take place unless both of them assign the same value to different commodities which they possess.
3. Lack of Sub-divisions: One serious draw back of Barter system is that even when double coincidence of wants exists between the two parties, the exchange may not take place even then. This is the particularly cause in those commodities which cannot be sub-divided. For instance a person has a cow with him and wishes to get 40 kilograms of wheat. It is clear that the value of the cow is much more than the value of 40 kilograms of wheat. What part of the cow should be given in exchange of 40 kilograms of wheat? Just imagine if the cow is cut into pieces, wheat value can it command?
4. Lack of Store of Value: Another serious inconvenience which arises under Barter that the goods particularly perishable ones cannot be stored for a longer period. They lose their value as time passes on.
5. Specialization not possible: Under Barter economy each person is jack of all trades and master of one. A high degree of specialization cannot be achieved under it.
6. Payment in Future: Under the Barter system, it is very inconvenient to lend goods to other people. With the lapse of time, the value of commodities may fall. So it becomes difficult to make payments in future.
7. Difficulties of Transfer of Wealth: There is great difficulty in transferring of wealth from one place to another under Barter system. For instance if a person has to take one hundred heads of cattle from Kashmore to Karachi show much difficulty he would feel? The risk and inconvenience of transportation is major difficulty of Barter system.
8. Difficulties in Tax collection: Another difficulty which arises under Barter system is that the tax cannot be collected, in the form of goods. If commodities are collected from the tax payers, they will not only lose value as time passes on but are difficult to store also.
HOW INCONVENIENCES OF BARTER SYSTEM HAVE BEEN REMOVED BY MONEY
The use of money has converted a Barter economy into monetary economy. The money has overcome difficulties and inconveniences of the barter system in the following ways.
1. Use of Money: Money is now used as (i) medium of exchange, now goods and services are purchased and sold with the help of money. (ii) Money now serves as common measure of value, the problem of comparing the prices of goods and services in the market is now simplified. (iii) With the help of money the exchange of present goods on credit has been made easier. The problem of deferred payments has been satisfactory solved with the help of money. (iv) Money as liquid store of value has facilitated its possessor to purchase any other asset at any time. (v) Though money value can be easily and quickly transferred from one place to another.
2. Liquidity of Wealth: Money imparts liquidity to various forms of wealth such as land, machinery, stocks store etc. These forms of wealth can be easily converted into money.
3. Establishment of financial institutions: The introduction of money has made it possible to establish financial institutions like central bank, commercial banks etc, which deal in currency and near money assets such as bills of exchange, bonds, shares etc.
4. Market mechanism: In monetary economy market mechanism operates. The demand and supply are brought into balance by movement of prices. The decision of what wow and for who to produce are determined in accordance with the market conditions or dictates of price mechanism.
5. Circular flow of money: In a monetary economy there is circular flow of money. Money flows from firm (as a payment for factor services) to the households. It flows from households to firms as the price of goods and services.
6. Process of development: In a Barter economy the process of economic development is slow. With the use of money division of labour has taken place, technology has developed, researches are being carried out, trade has expanded etc. In monetary economy, there is thus an all round economic progress.
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