When someone exchange 1kg rice for 2kg wheat, to fulfill the emerged need, this is known as bartering. In this deal one good is exchanged for another good, with the prerequisite that both parties involved should need what is offered by another. Below are few quick points about barter system:
|Two parties are involved (How can single person do transaction)|
|Both parties should need what is offered (Two wants required)|
|Goods or services are exchanged for one another (Not money)|
|Goods or service quality effects the transaction|
|High cost in absence of Barter Organization|
Imagine a situation in which a mason is contacted by few persons who want to hire him for construction work. The first one offer the mason some rice (not money), mason denies as he do not want rice which he may already have in surplus. Second person offer the mason some other commodity and third some other;
Until mason get appropriate commodity of his requirement he is not going to agree, but at same time he is loosing opportunity to earn something different which he can later exchange for what he requires. Thus in absence of commonly accepted medium of exchange (or money) this deal is going to be complex and is hurting both parties who are having necessities.
Barter limitations and requirement of money:
- Though barter in present age has helped many companies to evade tax, as the transaction was not done in term of money (unlawful), But this can only be successful where two parties agrees to give one another what they need. This double coincidence of wants is prerequisite.
- The system can prove whole lot costly, as the cost to find the appropriate party and apt quality requirement can slowdown the transaction.
- Perishable goods storage and shelf life are other hurdles
- Difficulties in measuring different goods in term of another (and not in term of money)
- The good can be stolen
Money ‘which becomes an intermediate good and legally accepted medium of exchange’ removes all above hurdles mentioned:
- No double coincidence of wants needed, one can simply provide goods or service in exchange of money and again exchange the money for his required goods and service.
- As money is legally accepted medium of exchange, there won’t be any hassle to find the party to complete the transaction.
- Money is not a perishable item.
- Everything can be compared to single good known as ‘money’. Same for both rich and poor.