What is the direct exchange of goods and services for other goods and services?

Barter Exchange: Meaning and Problems of Barter Exchange!

A. Meaning of Barter:

‘Direct exchange of goods against goods without use of money is called barter exchange.’

Alternatively, economic exchanges without the medium of money are referred to as barter exchanges. An economy based on barter exchange (i.e., exchange of goods for goods) is called C.C. Economy, i.e., commodity for commodity exchange economy. In such an economy, a person gives his surplus good and gets in return the good he needs.

For example, when a weaver gives cloth to the farmer in return for getting wheat from the farmer, this is called barter exchange. Similarly the farmer can get other goods of his requirement like shoes, cow, plough, spade, etc. by giving his surplus wheat (or rice or maize). Thus, the system of barter exchange fulfills to some extent the requirements of both the parties involved in exchange.

However, as the transactions increased, inconveniences and difficulties of barter exchange also increased involving rising trading costs. Trading costs are costs of engaging in trade. Its two components are search cost and disutility of waiting.

Remember, search cost is the high cost of searching suitable persons to exchange goods and disutility of waiting refers to time period spent on searching the required person. This ultimately led to evolution of money as medium of exchange. Following are some of the drawbacks or inconveniences of barter.

B. Inconveniences (Problems) of Barter Exchange:

1. Lack of double coincidence of wants:

Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person wants to buy and sell. ‘Simultaneous fulfillment of mutual wants by buyers and sellers’ is known as double coincidence of wants.

There is lack of double coincidence in the wants of buyers and sellers in barter exchange. The producer of jute may want shoes in exchange for his jute. But he may find it difficult to get a shoe-maker who is also willing to exchange his shoes for Jute.

Thus, a seller has to find out a person who wants to buy seller’s good and at the same time who must have what the seller wants. This is called double coincidence of wants which is the main drawback of the barter exchange.

2. Lack of common measure of value:

In barter, there is no common measure (unit) of value. Even if buyer and seller of each other commodity happen to meet, the problem arises in what proportion the two goods are to be exchanged. Each article must have as many different values as there are other articles for which it is to be exchanged.

When thousands of articles are produced and exchanged, there will be unlimited number of exchange ratios. Absence of a common denominator in order to express exchange ratios creates many difficulties. Money obviates these difficulties and acts as a convenient unit of value and account.

3. Lack of standard of deferred payment:

There is problem of borrowing and lending. It is difficult to engage in contracts which involve future payments due to lack of any satisfactory unit. As a result, future payments are to be stated in term of specific goods or services. But there could be disagreement about the quality of the good, specific type of the good and change in the value of the good.

4. Difficulty in storing wealth (or generalised purchasing power):

It is difficult for the people to store wealth or generalised purchasing power for future use in the form of goods like cattle, wheat, potatoes, etc. Holding of stocks of such goods involves costly storage and deterioration.

5. Indivisibility of goods:

How to exchange goods of unequal value? If a household wants to sell his cow and get in exchange cloth equal to the value of half of his cow, he cannot do so without killing his cow. Thus, lack of divisibility of goods makes barter exchange impossible.

In order to overcome the above disadvantages of the barter system, money was invented by the society.