You can always resort to orchestrating triangular or multilateral trade that we learned about earlier, but that also takes time. And, throughout the process, you're traveling from place to place and lugging heavy tables. This takes energy that you can be using more efficiently to make more tables. After all this hassle, you may be ready to quit the whole table business and instead fulfill your dreams of becoming a wine merchant.
Let's take another hypothetical situation: What happens when you want something small, like some tomatoes , and the tomato vendor asks you for a table in return? You'd probably argue that a table is worth a lot more than a few tomatoes. Unfortunately, the vendor can't do much with a single table leg, and you don't want hundreds of tomatoes that will spoil before you can eat them all.
When you just have a few very valuable items, you'll have trouble making exchanges for several less valuable ones. Or, if you trade perishable goods, time becomes more of a factor -- you must trade them quickly or watch your assets rot into worthlessness. Because of this, you might be pressured into taking unfair deals. Another problem barterers run into is deciding on an equal trade.
You've probably heard the expression, "It's like comparing apples to oranges. Can you imagine how difficult it would be to decide how many cows are worth how many pieces of wood? When a society agrees on an acceptable form of currency, however, these problems either disappear or severely diminish. You no longer have to find people who have what you want and are willing to barter their stuff for what you're offering. With the lapse of time the value of goods may fall.
So one would like to suffer a loss. Difficulties For Finance Minister Under barter system, goods can not be collected as a tax, because these can not be kept in a store for a longer period. Difficulties For Transfer Of Wealth Under this system transfer of wealth also becomes a problem for the people.
For example one person wants to take one thousand cow from Gujrat to Ahmadabad, how much difficulty he would feel? Now by the use of money all these difficulties have been removed. Under the barter system a high degree of specialization is not possible. A person cannot yet the skill of specialization the particular field as we find in the present system of production. Search this site. Difficulties in barter system. Lack Of Double Coincidence Of Wants :- The direct exchange of one commodity for an other requires direct satisfaction of both the parties.
Lack Of Common Standard Of Value :- All the goods which are be exchanged are not of the same value, so it is very difficult to determine the ratio of exchange between the different goods. Lack Of Subdivision :- In case of goods which are indivisible the value loss will be suffered. Then, to do this transaction cow has to be divided. But cow cannot be divided or cut into pieces because cow will lose much of its value if it is divided. Thus, impossibility of division of goods for the purpose of exchange posed a great difficulty and obstructed the growth of trade.
For example, if Amit wants to have a saw in exchange of a wooden table which he has made. Not only should Amit be able to assess the value of saw but the maker of a saw should also be able to determine the value of the wooden table which Amit wishes to exchange. All this required a lot of information about goods for which people must spend a good deal of time and resources to obtain such information.
If there exists a medium of exchange, it will solve half the problem. However, Amit will still have to determine the value of the table in terms of the medium of exchange. Thus, if there exists a medium of exchange, with well-known characteristics, it will reduce the information costs of trading.
Without the medium of exchange information cost will indeed be very large. Another problem of barter economy relates to the production of large, costly goods. Suppose an individual who has technical skill and equipment to manufacture a car will not have much incentive to manufacture it in the barter economy. This is because he can exchange a car with a person who has enough goods having a value equal to a car so that their exchange with a car can take place.
The car maker must obtain food, clothing and several other commodities of day-to-day consumption in exchange for a car. It will be very difficult, almost impossible to find a prospective buyer who has enough of these goods and services to give in return for a car.
It is evident from above that barter system could work in a primitive economy where life was simple and man was self-sufficient. As man made some economic progress, division of labour or specialisation and large-scale production came to exist, barter system could not fulfill the increasing needs for exchange of goods. Due to the difficulties of exchange barter economy would have no large-scale production, no advantage of the use of capital-intensive specialised machinery and no easy and cheap means in which wealth could be stored.
The range of goods produced must be much smaller than those produced in the modern developed economies. To meet the needs for a common unit of account and also as a generally accepted medium of exchange and thereby to overcome the difficulties faced under the barter system, money was invented.
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