Barter system refers to the voluntary exchange of goods, and often services, between individuals without the use of any medium of exchange like currency. It is, therefore, a direct exchange of goods and services.
Certain problems of the barter system of trade were solved by the introduction of currency. Chief among the problems are
(1) Lack of double coincidence of wants
For barter system to effectively work, both the parties – each exchanging different goods or services – has to agree to exchange their asset. Often finding a common need among two parties is difficult. Hence, opportunities for exchange are limited in the barter system.
Example, A should be wanting what B is selling, and in turn B must be in need of what A is selling – Exchange will happen only in such situations.
(2) Lack of Common Measure of Value
The goods and service are directly exchanged in the barter system, without assigning them any monetary value. Hence, there exists a huge possibility for errors in exchange. There are is a problem of valuing ‘how-much-for-how-much’ for the exchange to be efficient.
Example, if A is selling Camels and B wants Camel and is ready to exchange Apples there arises a question – ‘How much Camel is an Apple or vice-versa’. Often such exchanges end in inefficient returns to either participant.
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