state the problems of barter system of exchange. How does money solve them?
The various drawbacks of the barter system are as follows:
1. Problem of double coincidence of wants
Double coincidence of wants implies that needs of two individuals should complement each other for the exchange to take place. For example, in the above case, the second person must need rice in exchange of tea.
2. Lack of common unit of value
Under barter system there was no common unit for measuring the value of one good in terms of the other good for the purpose of exchange. For example, a horse cannot be measured in terms of rice in the case of exchange between rice and horse.
3. Difficulty in wealth storage
It was very difficult to store commodities for future exchange purposes. The perishable goods like grains, milk and meat could not be stored to exchange goods in future. Therefore, wealth storage was a major difficulty of batter system.
4. Lack of standard of deferred payments
The future payments could not be met in a C-C economy (barter system) as wealth could not be stored. It was very difficult to pay back loans.
Money overcomes the shortcomings of barter system in the following manner:
1. Money solves the problem of double coincidence of wants. For example, if a person needs wheat in exchange of tea, then he/she must search for a person who is ready to trade wheat for tea. Money made the need for such searches redundant.
2. In barter system, it was very difficult to measure the value of one good in terms of another. For example, it is difficult to calculate the value of a cow in terms of wheat.
3. It was very difficult to store goods, especially perishable goods (fruits, meat, etc.) for the purpose of value storage. Money serves this purpose.
4. The contractual or future payments are much difficult to be made in barter system. For example, a worker working on contract basis could not be paid in terms of rice or chairs.
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The biggest problem of the barter system in economics is that primitive barter requires those whom you wish to trade with must have something YOU want, and that you in turn have something THEY want. So, for instance, you may see a guy with a tasty hunk of venison, but he doesn't want the hemp rope you made or the flour your spouse ground from the wheat you grew. Or vice versa... people want what you have, but you're not interested in any of the things they have to trade. Money was created as a tool to help mankind avoid this dilemma. However, the values of monetary units vary significantly from one locale to another, so physical object money can often have the same drawbacks as barter.
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