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Define barter system and explain limitations of barter system.

Vidyadip · Accepted Answer

Barter system:
The system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money is known as the Barter System. This system existed in olden times.Limitations of Barter system:

When the population increased and the world developed socially as well as economically, the demand for goods and services of people changed as well as increased.
With the rise in industrialization, urbanization, division of labour and Specialization made the Barter system limited, less applicable and impractical.
Dependency on mutual exchanges decreased and the personal needs increased which the Barter system proved unable to solve.

The limitations of Barter system are explained below:
$1.$ Issue of ‘double coincidence of wants’ and mutual adjustment of wants:
When the world grew socially as well as economically, the needs of people grew and changed continuously This made the economic system complicated. For example, those who had rice to exchange for wheat did not need wheat but clothes for the barter. While on the other hand the one who had clothes did not want rice but wanted oil in exchange of clothes. The Barter system assumes ‘coincidence of wants’ as a continuous process. This coincidence may not hold true always and the traders willing to exchange may not be in
need of item that the other trader would like to exchange. This served as a major limitation of the Barter system.Such needs made it difficult to barter. The rising needs also proved to be a challenge for establishing barter between indivisible and divisible goods.
$2.$ Difficulty in storing wealth:

The Barter system posed the problem of storage of the exchanged and acquired goods or wealth.
For example, a farmer had to store large amount of crop that too for a very long period in order to fulfill even the simplest needs like shoes or clothes that he may need in the future. This became practically impossible.
A person like farmer producing goods in large volumes had to immediately exchange his goods against other goods or services. In case he failed to do this he had to store his large volume of production for a long time which was not possible.

$(3)$ Problem of measurement of value:

When the world moved towards division of labour and specialization problems of measuring the value of products, goods or services on equal basis arose.
For example, it was easy to exchange wheat for rice and also easy to . maintain their rates. But, as economic development took place several goods and services started getting exchanged. This made exchange of products like wheat with other goods and services difficult.
Problems like, if $20 \ kg$ of wheat can be exchanged for $40 \ kg$ of rice, $10$ meters of cloth and $1 \ kg$ of ghee, then how much cloth can one get for $1 \ kg$ ghee?
These problems posed the need of a common measure of value of goods to compare and assess the values of all goods against each other.
These difficulties led to the origin of money. Money became a standard measure of value and a common denomination of trade.

Country	Norway	$USA$	Srilanka	China	India	Pakistan
National Income Growth Rate $(2014)$	$2.2$	$2.4$	$4.5$	$7.3$	$7.3$	$4.7$

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