Disadvantages of Barter Trade

• It is impossible to barter unless A has what B wants, and A wants what B has. This is called double coincidence of wants and is difficult to fulfill in practice.

• Even when each party wants what the other has, it does not follow they can agree on a fair exchange. A good deal of time can be wasted sorting out equations of value.

• The indivisibility of large items is another problem. For instance if a cow is worth two sacks of wheat, what is one sack of wheat worth? Once again we may need to carry over part of the transaction to a later period of time.

• It is possible to confuse the use value and exchange value of goods and services in a barter economy. Such a confusion precludes a rational allocation of resources and promotion of economic efficiency.

• When exchange takes place over time in an economy, it is necessary to store goods for future exchange. If such goods are perishable by nature, then the system will break down.

• The development of industrial economies usually depends on a division of labour, specialization and allocation of resources on the basis of choices and preferences. Economic efficiency is achieved by economizing on the use of the most scarce resources. Without a common medium of exchange and a common unit of account which is acceptable to both consumers and producers, it is very difficult to achieve an efficient allocation of resources to satisfy consumer preferences.

For these reasons the barter system is discarded by societies which develop beyond autarky to more specialized methods of production.  For such peoples a money system is essential.

Money may be defined as anything generally acceptable in the settlement of debts.