Why barter system is inefficient

Thus a barter system is time-consuming and is a great hindrance to the development and expansion of trade. Another difficulty under the barter system relates to the lack of a common unit in which the value of goods and services should be measured.

Consequently, one party is at a disadvantage in the terms of trade between the two goods. Moreover, under the a barter system the value Of each good is required to be stated in as many quantities as there are types and qualities of other goods and services. The exchange rate formula given by Prof. For example, if there are different types of goods in a barter economy, then there would be exchange rates for it to function smoothly, i.

This makes accounting an impossibility because a balance sheet would consist of a long physical inventory of the various types and qualities of goods owned and owed. Similarly, it is difficult to draw and interpret the profit and loss accounts of even a small shop. That is why the existence of the barter system is associated with a small primitive society confined to a local market.

The barter system is based on the exchange of goods with other goods. It is difficult to fix exchange rates for certain goods which are indivisible. Such indivisible goods pose a real problem, under barter. A person may desire a horse and the other a sheep and both may be willing to trade.

The former may demand more than four sheep for a horse but the other is not prepared to give five sheep and thus there is no exchange. If a sheep had been divisible, a payment of four and a half sheep for a horse might have been mutually satisfactory. Close Privacy Overview This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website.

We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience. Necessary Necessary. Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.

The cookie is used to store the user consent for the cookies in the category "Analytics". The cookies is used to store the user consent for the cookies in the category "Necessary". The cookie is used to store the user consent for the cookies in the category "Other.

The cookie is used to store the user consent for the cookies in the category "Performance". It does not store any personal data. Functional Functional. Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features. Performance Performance. Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.

Analytics Analytics. Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc. Advertisement Advertisement. Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. Today, U. As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account.

Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or some other commodity held at a bank. During much of its history, the money supply in the United States was backed by gold and silver. As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved towards the use of fiat money.

Fiat money has no intrinsic value, but is declared by a government to be the legal tender of a country. The only backing of our money is universal faith and trust that the currency has value, and nothing more. Improve this page Learn More. Skip to main content. Module Money and Banking. Search for:. Try It. Watch It Learn more about the functions of money in this video clip. Watch It This video provides an overview of how money has evolved through the ages.

GLOSSARY barter: literally, trading one good or service for another, without using money commodity money: an item that is used as money, but which also has value from its use as something other than money commodity-backed currencies: dollar bills or other currencies with values backed up by gold or another commodity double coincidence of wants: a situation in which two people each want some good or service that the other person can provide fiat money: something used as money, but which has no intrinsic value besides that medium of exchange: whatever is widely accepted as a method of payment money: whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.

Did you have an idea for improving this content? Licenses and Attributions. CC licensed content, Original.