The direct exchange of one commodity or service for another without use of money is called barter system. So a barter system is that in which no money exists. It is money less economy.
Definition:
According to G. Nomas,
“Barter system is a form of trading in which goods are exchanged directly for other goods without the use of money as an intermediary”.
In words of R.H.Parker,
"Barter system is a direct exchange of goods and services without the use of money as either a means of payment or a unit of account."
Inconvenience or Difficulties of Barter System
1. Double Co-incident of Wants
The barter system needs the matching of wants. The exchange of goods is possible if the wants of two parties coincide. For example a person having a table wants to exchange it with the chair. He has to find another person who wants to exchange his chair with table. It is the biggest problem of the barter system. Due to this problem trade under barter system was very limited.
2. Economic Measurements
Under barter system it was not possible to measure economic variables both at macro & micro level. There was no system to measure personal income or micro level and GDP on macro level.
3. Future Payments
Under barter system it is very difficult to lend goods to other people. With the passage of time the value of goods may fall. So it becomes difficult to make payments in future.
4. Estimation and Budgeting Problem
Under barter system it is very difficult to estimate expenses and income. The people & the government cannot make any estimate of their income & revenue because it is not possible to forecast the value of goods with any reasonable certainty.
5. Comparison of Living Standards
Living standard of people is a measuring rod of the economic growth of nay country. It is not possible to compare the living standards of people under barter system because there is no unit to express the wealth of people.
6. Common Measure of Value
The barter system has no common measure of value. There is no medium to measure the value of goods. For example a man has a cow and the other has goats and both are willing to trade. The owner of cow estimates the value of one cow equal to the five goats. But the owner of goats estimates the value of one cow equals to four goats. The exchange cannot take place unless both of them estimate the same value.
7. Tax Collection
The taxes are collected for the economic development. The amount collected is spent on education, hospitals, roads etc. when tax is collected in the form of goods it is very difficult for the government to spend such goods for development projects. Another problem is that the amount of storage and collection charges may be more than the amount of the tax collected.
8. Transfer of Wealth
The barter system does not help to transfer wealth from one place to another. The movable and immoveable wealth cannot be shifted from one place to another because sometimes the carriage cost is much higher than the actual cost of wealth. The movement of land and building is not possible at all.
9. Storing of Wealth
The barter system does not provide the facilities of storage of wealth for longer time period. Some commodities are perishable in nature like vegetable, fruits etc. these goods lose their whole value if stored for longer time period. While other goods like wheat lose their quantity and quality if stored for longer time period. Another problem is that the storing of goods also increases the storing cost.
10. Sub Division
Many goods are not divisible. Sometimes this fact becomes a very big problem in exchange. For example if a person has a horse and wants to get a pen. The value of the horse is much more than a pen. In this case the exchange is not possible because the horse can not be divided into smaller pieces.
11. Specialization Problem
Under barter system each person is jack of all trades and master of none. A high degree of specialization cannot be achieved under barter system because every one tries to attain self sufficiency.
How the Use of Money has Reduced the Problem of Barter System
1. Revenue Collection
The use of money removed the problem of tax collection. When tax is collected in the form of money only then the government can use it for the development projects.
2. Ease of Borrowing and Lending
The money has removed the inconvenience of future payments. Now the loans can be taken from banks and financial institutions. The future payments can be stated in terms of money.
3. Medium of Exchange
The use of money eliminated the problems of double coincidence of wants. Now anyone can buy anything and sell anything for money. There is no need to find a person who is need of a thing which you have in surplus. In modern economy people sell their goods and services for money and use that money for purchase of other people.
4. Measurement of Efficiency
Under barter system there was no standard of measuring efficiency. The use of money has made it possible to measure output, costs and efficiency in term of definite units of money.
5. Investment and Saving
Money has made it possible and extremely easy to invest and save. Now we can save our wealth by investing it in different saving schemes. Further we can save our wealth in form of foreign exchange, gold, silver etc which can easily be converted into cash when required.
6. Development Process
In a barter economy the process of development I slow. With the use of money technology has developed, research work has increased: trade has expanded which results in overall economic development.
7. Increase in Foreign Investment
Money has made possible the huge investment in today’s world. Under barter system the foreign investment was impossible but the use of money made it possible because in money economy wealth can easily be transferred from one place to another.
8. Ease of Specialization
In barter system specialization is not possible because everyone tries for self sufficiency. Specialization not only helps in reducing cost of production but also results in higher production. The increase in production then can be traded to buy other goods.
9. Storing of Wealth
The problem of storing wealth has been removed by the use of money because wealth can easily be stored in the form of money.