Written by Barter trade refers to a system of exchange where goods and services are traded directly without the use of money.
While barter trade may seem like a simple and straightforward system, it is associated with several difficulties or inconveniences that can make it a challenging mode of exchange.
These difficulties include the difficulty of common measure of value, difficulty in the double coincidence of wants, Difficulty in sub-division, difficulty in storing wealth, and difficulty in making deferred payments.
Difficulty in Double coincidence of wants
Barter trade requires both parties must possess goods or services that the other party wants, and both parties must be willing to trade those goods or services. This is referred to as a double coincidence of wants.
The smooth functioning of the barter system requires a double coincidence of wants on the part of those who want to exchange goods or services.
That is, the person who wishes to trade his good or service needs to find some other person who is not only willing to buy his good or service but also possesses that good that the former wants.
For example, if a person wants to trade a bag of rice for a bag of beans, they must find someone who has a bag of beans and wants a bag of rice.
If the person with the bag of beans does not want a bag of rice, or if the person with the bag of rice does not want a bag of beans, then the barter trade cannot take place.
The existence of such a double coincidence of wants is a remote probability as there is only a small chance that the condition of double coincidence of wants will be met.
Because of the issue of double coincidence of wants, barter trade is a very laborious and time-consuming process.
Difficulty of Common Unit
In a barter system, where goods and services are exchanged directly without the use of money, the absence of a common measure of value is particularly problematic.
In a batter system, there is a lack of a common unit in which the value of goods and services can be measured.
Even if the conditions of double coincidence of wants are met (i.e., both parties have something the other wants), there may still be disagreements over the relative value of the goods being exchanged to ensure fair trade
For example, if two persons want to trade a bag of rice for a bag of beans, they may not agree on the value of the rice and beans each other.
The person with the bag of rice may believe that the rice is worth more than the beans, while the person with the beans may believe that the beans are worth more than the rice.
This lack of agreement on the relative value of the goods can lead to difficulties in determining a fair exchange rate.
So, without a common measure of value, it is difficult for both parties to agree on fair trade.
Therefore, the lack of a common measure of value makes it extremely difficult for people to determine the value of their goods and exchange them for one another.
Difficulty in Subdivision
Barter trade is possible when goods can be divided and subdivided for exchange purposes.
Some commodities like goats, horses, and cows, cannot be split into smaller units, without destroying their values.
For example, a person may have desired a horse and the other a sheep and both may be willing to trade.
The former may demand four sheep for a horse, which is equivalent to giving 1 sheep for a quarter of a horse.
However, since it is not possible to divide the horse without killing the horse, no trade will be possible between the two persons.
Difficulty in Storing Wealth
In the barter system, goods are used as a form of exchange instead of money.
Therefore, if someone wishes to store wealth, they would have to store the goods themselves.
However, this poses a problem because some goods are perishable and have a limited life span.
For example, fruits, vegetables, and other agricultural products are highly perishable and may spoil quickly if not consumed or sold within a short period.
Similarly, non-perishable goods like clothes, electronics, and other consumer goods may lose value over time due to changes in fashion or technology.
For example, an electronic gadget that was highly valued a few years ago may lose its value or become obsolete as newer models are released into the market.
This makes it difficult for people to store wealth in the form of goods because the value of the goods may decrease over time.
Furthermore, the storage of goods requires a significant amount of space and resources, which may not be readily available to everyone.
Therefore, it is very difficult to store goods in a barter system due to the problem of storage, loss of value and perishability of the goods.
Difficulty in Making Deferred payments
Since there is no medium of exchange( like money) that can be used to facilitate deferred payments, debt contracts cannot be entered into a barter system.
In a barter system, debt contracts are not possible due to disagreements on the part of the two parties on the following grounds:
- It would often invite controversy as to the quality of the goods or services to be repaid. For example, if one party agrees to repay another party with a certain quantity of wheat, there can be disagreement on the quality of the wheat that will be repaid. One party might believe that the wheat repaid is of a higher quality or lower quality than the one agreed to be repaid.
- The two parties may not be able to agree on the specific commodity to be used for repayment.
- Both parties face the risk that the commodity to be repaid would increase or decrease seriously in value during the period of deferment. For example, if one party agrees to repay another party with wheat, the value of wheat might increase in terms of other commodities, which would be to the debtor’s regret or the value of wheat might decrease markedly in value, to the creditor’s regret.
Therefore, because it is impossible to make just payments involving future contracts under the barter system, deferred payments are not allowed in barter trade
Money- A Removal of the Barter Problem
All the above difficulties of barter have been eliminated by the advent of money.
The use of money has solved the problem of the double coincidence of wants that are associated with barter trade.
With money, the need for the double coincidence of wants is eliminated.
Money serves as an intermediary that allows people to trade goods and services without having to find someone who has what they need and wants what they have.
Money has also eliminated the inconvenience of a lack of a common measure of units associated with barter trade.
With money, all goods and services can be valued in terms of their monetary price.
Money allows for a standardized pricing system that enables people to compare the value of goods and services.
Additionally, money has overcome the difficulty of subdivisions because paper money of small denominations can be used for the exchange of goods of small value.
Further, since the value of money remains relatively stable, wealth can be stored in the form of money without losing value, thereby removing the problem of storing wealth in the barter system.
Finally, money has solved the problem of deferred payment by allowing us to buy goods now and pay for them later with the money.
