New Barter System

MEANING OF BARTER
Barter means direct exchange of goods for good Barter system was prevalent at an early stage of man s economic life when the wants were very limited in number Man could easily satisfy all his wants which he produced himself But as time passed his needs began to increase He lost his self-sufficiency He began to produce some goods in greater quantity than he could consume himself The purpose was to exchange some of his products which he had in excess with those who had surplus products with.

themselves For instance if a fisherman wanted to have skins he could get them by giving fish to the hunter Similarly if a weaver wanted a pair of shoes he could receive that by giving some surplus cloth to the cobbler This dir exchange of surplus commodity for commodity with another person without the use of money is termed as Barter in Economics
Barter exists more in economically backward and commercially under-developed areas of the world Why to go far off in many of the Pakistani villages the payment to village artisan is still made in kind Women and children in the villages get sugar cloth spices toys sweetmeats etc etc directly in exchange for ghee cotton seeds wheat etc from the village shopkeepers In advanced countries of the world we do not come across the exchange of this type in their daily business It is because the rang of wants and the range of commodities are so wide that it is actually impossible to satisfy them through a direct exchange of goods In modern economy inside the country goods are not exchanged for goods but for money if we want to sell anything in the market we quote its price in money and receive money for it Similarly if we need anything from the market we find its price expressed in terms of money.

Here a question can be asked as to how this system of barter is found inconvenient and why it has been given up by the civilized world’. The answer to this question is that barter system was found inconvenient and so given up due to the reasons given below.

Inconveniences of Barter System
Before the introduction of money the following difficulties and inconveniences were experienced in the barter system

1. Double Coincidence of Wants.
The direct exchange of one commodity for another requires direct satisfaction of both the parties in the bargain The exchange can only be effective if a person is able to spare what the other person wants and at the same time needs what the other can spare For instance a person has surplus wheat with him and wishes to exchange it with cloth He will have to find a person who not only possesses sufficient cloth but also desires wheat This double coincidence as is obvious is very difficult to attain in this civilized world especially where the range of human wants is very wide The transactions cost of double coincidence of wants are very high.

2. Lack of Common Measure:
Another difficulty which arises under the system of barter is the absence of common measure which can help in the estimation of relative values of the two commodities. For instance, a man has a horse with him and the other a cow and both are willing to trade A man who has a horse assigns the value of one horse as two cows The other who has a cow designs the value of one cow as one horse and both stick to their respective valuations In the absence of common measure of value, the exchange between the two parties cannot take place unless both of them assign the same value to different commodities which they posses

3. Lack of Sub-divisions:
One serious drawback of barter is that even when double coincidence of wants exists between the two parties the exchange may not take place even then This is particularly the case in those commodities which cannot be sub-divided For instance a person has a cow with him and he wishes to get 40 kilos of wheat It is clear that the value of the cow is much more than the value of 40 kilos of wheat. What part of the cow should be given in exchange for 40 kilos of wheat? Just imagine, if the cow is cut into pieces, what value can it command?

4. Lack of Store of value:
Another serious inconvenience which arises under barter is that the goods particularly perishable ones cannot be stored for a longer period. They lose their value as time passes on.

5. Specialization not possible:
Under the barter economy each person is a jack of all trades and master of none. A high degree of specialization cannot be achieved under it.

6. Payments in the future:
Under the system of barter, it is very inconvenient to lend goods to other people. With the lapse of time, the value of the commodities may fall. So it becomes difficult to make payments in the future.

7. Difficulties of Transfer of Wealth:
There is great difficulty in transferring wealth from one place to another under barter. For instance, if a person has to take one hundred heads of cattle from Faisalabad to Karachi, how much difficult would he feel? The risk and inconvenience of transportation is a major difficulty of barter system.

8. Difficulties in tax collection:
Another difficulty which arises under barter system is that the tax cannot be collected in the form of goods. If the commodities are collected from the tax payers, they will not only los value as time passes on but are difficult to store also.

The inconveniences of barter account for the emergency of money. With the introduction of money, the difficulties of double coincidence of wants, the inconveniences of lack of division, the drawbacks of store of value etc., etc., have been removed to a great extent.

How money has removed the difficulties of barter system?
The use of money has converted a barter economy into a monetary economy. The money has over come the difficulties of barter system in the following ways.

(1) Use of money:
Money is used now as a (i) Medium of exchange. The goods and services are now purchased and sold with the help of money. The difficulty of double coincidence of demand has been removed with the help of money. (ii) Money now serves as a common measure of value. The problem of cc the prices of goods and services in the market is now simplified. (iii) With the help of money, the exchange of present goods on credit has been made easier. The problem of deferred payments has been satisfactorily solved with the help of money. (iv) Money as a liquid store of value has facilitated its possessor to purchase any other asset at any time. (v) Through money value can be easily and quickly transferred from one place to another.

(2) Liquidity to wealth:
Money imparts liquidity to various forms of wealth such as land, machinery, stocks stores etc. These forms of wealth can be easily converted into money.

(3) Establishment of financial institutions:
The introduction of money has made it possible to establish financial institutions like the central bank, commercial banks etc which deal in currency and near money assets such as bills of exchange, bond, shares etc.

(4) Market mechanism:
In a monetary economy market mechanism operates The demand and supply are brought into balance by the movement of prices The decision of what how and for whom to produce are determined in accordance with the market conditions or dictates of price mechanism

(5) Circular flow of money:
In a monetary economy there is a circular flow of money. Money flows from firms (as payment for factor services) to the households If flows again from households to the firms as the prices of goods and services

(6) Process of development:
In a barter economy the process of economic development is slow. With the use of money division of labor has taken place technology has developed researches are being carried out trade has expanded etc In a monetary economy there is thus an all round economic progress