Written by The barter system is an ancient method of trade that was used before the invention of money.
It involves the direct exchange of goods and services between two parties, without the use of money.
In a barter transaction, the parties involved exchange their goods or services for other goods or services they need.
This necessitates that both parties must have something that the other party wants.
For example, a farmer may exchange a sack of potatoes for a chicken from a poultry farmer. In this case, the farmer has a surplus of potatoes and wants to exchange them for something he needs, which is chicken.
Barter trade was mostly used in the olden days. In modern times, the use of money has made the barter system obsolete in most parts of the world.
Advantages of the Barter System
1. Suitable in a hyperinflationary economy: In a hyperinflationary economy, the value of the currency decreases rapidly, as the inflation rate is rising rapidly.
To cope with the rising inflation rate, people in a hyperinflationary economy often turn to barter trade so that goods and services will be exchanged directly for other goods and services, without the use of money.
By resorting to barter trade, people do not have to rely on the decreasing value of the currency to obtain what they need.
Barter trade ensures that they are not caught up in the value-eroding nature of hyper-inflation
Therefore, trade by barter is suitable in a hyperinflationary economy.
2. No wastage: In trade by barter, the number of goods demanded usually equates to the quantity supplied.
Hence, the market will be cleared as there will be no leftovers.
3. Simplicity: Trade by barter is very simple. It only involves a direct give and take of goods and services.
For instance, if a farmer has a surplus of potatoes but needs eggs, he can simply trade some of his potatoes with a neighbour who has chickens and needs potatoes.
There is no need for the farmer to convert his potatoes to money and then use that money to buy eggs from a supermarket or grocery store.
More so, unlike in a monetary system where one has to deal with the complexities arising from different denominations of currencies, exchange rates, and banking systems, in a barter system, people can simply trade what they have for what they need.
Therefore, the barter system enables us to completely avoid the complexities of the monetary system.
4. No real concentration of economic power: There is a limit to the wealth that an individual can accumulate in a barter system since goods and services are directly exchanged between parties without the use of money.
in a barter system, the amount of goods and services that can be accumulated or stored is limited by their physical properties.
For example, perishable goods like food cannot be stored for long periods of time, and durable goods like furniture take up physical space.
There is a limit to which goods and services can be stored.
So, the possibility that wealth will be concentrated in the hands of a few rich people is, to a large extent, eliminated.
This is one advantage that the barter system has over the monetary system as money can be easily stored.
Disadvantages of Barter System
1. Problem of double coincidence of wants: For a barter transaction to successfully occur, a double coincidence of wants is required as two parties need to have a mutual desire for each other’s goods or services to exchange them.
In other words, if Mr B wants to exchange his goods for someone else’s goods, he must find someone who wants his goods and has what he desires.
For example, a teacher who requires rice must look for someone willing to exchange rice for some teaching services.
This requirement for double coincidence of want made bartering an inefficient system for exchanging goods and services, as it can take a lot of time and effort to find the right match for an exchange.
In fact, the problem of double coincidence of wants is one of the major reasons why the barter system did not succeed and many economies are now using money because money obviates this problem of double coincidence of wants.
2. Lack of common measure: Even after surmounting the problem of double coincidence of wants, individuals were still faced with the problem of lack of common measure.
The problem of a common measure arises because there was no universally accepted unit of measurement or currency that can be used to value goods or services.
Without a universally accepted unit of measurement, it will be difficult to strike a bargain as the two parties may disagree about what proportion of their two goods should be exchanged for fair trade.
For example, in a scenario where a teacher wants rice and a farmer needs teaching services, they may have a difficult time determining the fair exchange rate for their goods and services.
The teacher may offer one hour of teaching service for a bag of rice, while the farmer may think that two hours of teaching service is equal to a bag of rice.
Without a common measure, it will be challenging to reach a mutually acceptable exchange rate.
3. Unsuitable for deferred payment: Deferred payment is the temporary postponement of the payment of a debt or bill.
However, in a barter system where goods and services are exchanged directly without the use of money, it becomes difficult to execute a deferred payment.
This is because the barter system does not provide a generally acceptable unit of exchange in which terms of deferred payment can be written.
It will be difficult to defer payment in barter because there will always be disputes arising from the quality and nature of the goods to be repaid.
Furthermore, both parties engaging in barter trade also risk the under-valuation or over-valuation of goods to be repaid.
Suppose you lend someone a bag of rice and they promise to give you four bags of beans in return.
However, if the value of beans goes up (meaning they become more expensive) compared to rice, the person might not want to repay you with four bags of beans anymore. This is because the four bags of beans they promised to give you would now be worth more than the bag of rice they borrowed from you.
Indeed, as a result of the interplay of demand and supply, rise and fall in the value of commodities are common in world economies. Hence, trade by barter is not suitable for deferred payment.
4. Indivisibility of certain goods: This is another disadvantage of the barter system.
Not all goods are divisible. As such, it may be difficult to exchange a bigger indivisible commodity for a smaller indivisible commodity.
To illustrate, let’s consider the case of a computer and bulbs.
Let’s assume that the price of a computer is 200 bulbs. This implies that: if an individual is to exchange a bulb for a computer, one-two hundredth of the computer will have to be sacrificed.
You will agree with me that this transaction would not take place because dividing the computer into 200 pieces will destroy the utility that can be derived from it.
Therefore, it is difficult to exchange indivisible goods in the barter system.
5. Problem of storing value: In a monetary economy, money acts as a store of value in that individuals can successfully transfer purchasing power into the future.
However, in a barter economy, where goods are exchanged directly for other goods, the problem of storing value arises.
This is because goods such as rice, beans, and vegetables, which are used as a medium of exchange in a barter economy are often perishable and do not last for a long time.
Therefore, they cannot successfully act as a store of value as they would lose their value over time.
Moreover, even if the goods last longer, they would require high maintenance costs to sustain their function as a store of value.
For example, you may have to expend a lot on cattle feed to keep your cattle functioning as a stable store of value. Otherwise, the value of the cattle will reduce, and it would not be a reliable store of value anymore.
