Before the invention of the monetary system, the barter system, which used to be a form of commerce, predominated in the world for centuries. In this arrangement, exchanges of commodities and services take place. This indicates that the parties directly exchange their goods for food, weapons or any essential need having similar prices without the need for any financial instruments.
Features of the Barter System
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Reciprocal: In a barter system, the trade is reciprocal, meaning it is negotiated so that the participant receives the good they need, and in exchange, they do not give money but give some goods.
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Mutual Benefit: Back in the day before the invention of money and when society was less advanced, the barter system served as a traditional means of obtaining what people need by providing them with another good that meets their needs. The barter system helps all parties involved in this way.
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Absence of Money: In this kind of trade, there is no money exchanged. When there was no cash in the economy and no other form of payment was available, the barter system was used.
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Barter system currently only operates in an informal setting; it is not used as an official mode of exchange.
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Trade can be bilateral or multilateral depending on how many parties are involved and how many of them are able to provide what the other party needs.
Constraints of the Barter System
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Mutual Coincidence of Wants: This is among the most frequent issues participants in barter exchange encounter. Mutual coincidence, sometimes known as double coincidence, refers to the idea that if one party wants to trade a certain good with another, the latter party need not also be open to trading the good that the first party is offering. Therefore, two people's desires must be compatible.
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Lack of a Common Measure of Value: Another significant problem in barter trading is the absence of a Common Measure of Value. People, therefore, find it challenging to assess the genuine and accurate value of the commodity in the absence of any universal unit of measurement. Hence, the commodity is measured in terms of the commodity only.
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Divisibility of Goods: Certain goods cannot be divided into minor components without losing some of their actual value. The major time this issue occurs is when livestock is the traded good. Different commodities have different values.
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Value is only capable of being kept in the form of commodities, such as food grains, livestock, fruits, and vegetables, which is impossible owing to perishability, quality deterioration, lack of storage space, and costs associated with items.
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Future payment challenges: Since payments must be described in terms of products and services, it might be challenging to enter into contracts involving future payments in the absence of a reliable unit of measurement.
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Lack of Specialization: In the past, when the barter system was used often throughout the nation, people tended to be self-sufficient, or we could say they were a jack of all trades. Consequently, there wasn't any specialisation.
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Transport is challenging when commodities and services are traded for one another. Transportation is almost impossible.