Advantages and Disadvantages of Barter System

The barter system is the oldest system of trade which was prevalent or used many centuries back. It refers to that system under which goods or services were exchanged directly with other goods and services and there was no medium of exchange which is the case in present times where the medium of exchange is money. In order to understand more about the barter system let’s look at some of the advantages and disadvantages of the barter system –

Advantages of Barter System

Simplicity

The first and foremost advantage of the barter system is that it’s the simplest system of trade which involves no complications so if you are a wheat seller and you want rice and rice seller wants wheat then both rice and wheat seller will exchange their products without any hassles of the modern-day monetary exchange system.

No Risk of Hoarding

Another benefit of the barter system is that since no money is involved people will produce and consume only what they want and there is no under or overproduction and also there is no question of people hoarding the commodities so as to sell them at a higher price which is the case in modern-day monetary system where due to presence of money people tend to inflate prices by hoarding even when the production is more than enough.

Less Chance of Exploitation

Another benefit of the barter system is that problem of foreign exchange and international trade does not arise and also there is less possibility of concentration of wealth in the hands of few people as different people specialize in different work and nobody can control everybody’s fortune which is the case with money where if one acquires money in abundance then he or she tends to control others and exploit them which is not possible in case of barter system.

Disadvantages of Barter System

Double Coincidence of Want

The biggest disadvantage of the barter system is that it requires a double coincidence of want so for example if you are a wheat producer and you want apple but the apple producer does not want to buy wheat rather he or she wants rice then you will have to go to rice producer first and buy rice from him or her and then you can buy apple in exchange of rice. Hence barter system leads to a lot of wastage of time in finding the other party and numerous exchanges in order to do a trade.

Practical Problems

Another limitation of the barter system is that since all people keep produce in physical form as there is no store of value there are many practical problems associated with storage of goods, transportation of goods, wastage of goods due to natural calamities and so on which is not the case when money is used as means of exchange because people can use money when they want any good or service.

Division into Small Products

Another limitation of the barter system is that a big product cannot be divided into small products so for example if the cow owner wants to purchase 1 bag of wheat but the wheat owner is giving 5 bags of wheat in exchange of 1 cow, now cow owner cannot cut cow into 5 pieces and hence this problem can be solved only if there is a medium of exchange present which in the modern economic system is money.

As one can see from the above that barter system has advantages as well as disadvantages but its limitations outweigh its benefits and that is the reason why in present times money is used as a medium of exchange and barter system is only in the books and not used anywhere in the world.