The following difficulties are involved in the barter system of exchange.
(i) Lack of Double Coincidence of Wants: The barter system requires a double coincidence of wants on the part of those who want to exchange goods or services. Double coincidence of wants means the simultaneous fulfilment of mutual wants by buyers and sellers. It is necessary for a person who wishes to trade his good or service to find some other person who is not only willing to buy his good or service, but also possesses that good which the former wants. For example, suppose a person possesses rice and wants to exchange it for sugar. In the barter system, he has to find out a person who not only has sugar but also wants rice. But, such a double coincidence is a rare possibility.
(ii) Lack of Common Measure of Value: Even if the two persons who want each other's goods meet by coincidence, the problem arises as to the proportion in which the two goods should be exchanged. There being no common measure of value, the rate of exchange will be arbitrarily fixed according to the intensity of demand for each other's goods. Accordingly one party is at a disadvantage in the terms of trade between the two goods
(iii) Lack of Divisibility: Another difficulty of barter
system relates to the fact that all goods cannot be divided and subdivided. In the absence of a common medium. of exchange, a problem arises when a big indivisible commodity is to be exchanged for a smaller commodity. For example, if the price of a horse is equal to five sheep, then a person having one sheep cannot exchange it for the horse because it is not possible to divide the horse into small pieces.
(iv) Problem of Storing Wealth: Under barter system, it is difficult to store value. In the absence of money, the individuals have to store wealth in the form of goods like horses, shoes, wheat, rice, etc. The value of stored commodities may change in the due course of time. These goods may perish after some time. Secondly, it is very expensive to store specific goods for a long time.
(v) Lack of Standard of Deferred (Future) Payments: Another drawback of barter system is that it lacks a standard of deferred payments. So, credit transactions requiring future payments cannot take place smoothly under barter trading. For example, if a person borrows a cow for a year or two, he cannot return the same because by that time, it would have become old. It may or may not be of the same quality as the original one.
(a) It may create controversy regarding the quality of goods or services to be repaid in future.
(b) The two parties may be unable to agree on the specific good to be used for repayment.