Barter is the exchange of products and services for other products and services. Barter system in economics, people do not use money for transactions. ‘Barter’ means to exchange goods and services for other products and services. Alternatively, economic exchanges without the medium of money are referred to as barter system exchange. An economy based on barter system exchange (i.e., exchange of goods for goods) is called C.C. Economy, i.e., commodity for commodity exchange economy. In such an economy, a person gives his surplus good and gets in return the good he needs.
Barter System in simple meaning it can also be defined as exchange of goods against goods. For example, I may say “She bartered with her friend and eventually got his watch against her badminton kit”.
Difficulties of Barter System in economics
1. Lack of double coincidence of wants: Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person wants to buy and sell. ‘Simultaneous fulfillment of mutual wants by buyers and sellers’ is known as double coincidence of wants.
2. Lack of common measure of value: In barter system, there is no common measure (unit) of value. Even if buyer and seller of each other commodity happen to meet, the problem arises in what proportion the two goods are to be exchanged. Each article must have as many different values as there are other articles for which it is to be exchanged.
3. Lack of standard of deferred payment: There is problem of borrowing and lending. It is difficult to engage in contracts which involve future payments due to lack of any satisfactory unit. As a result, future payments are to be stated in term of specific goods or services. But there could be disagreement about the quality of the good, specific type of the good and change in the value of the good.
4. Difficulty in storing wealth: It is difficult for the people to store wealth for future use in the form of goods like cattle, wheat, potatoes, etc. Holding of stocks of such goods involves costly storage and deterioration.
5. Indivisibility of goods: How to exchange goods of unequal value? If a household wants to sell his cow and get in exchange cloth equal to the value of half of his cow, he cannot do so without killing his cow. Thus, lack of divisibility of goods makes barter system exchange is impossible.
In order to overcome the above difficulties of the barter system, money was invented by the society.