What are limitations of Barter System?

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Problem 1 -Barter System Problem of Double Coincidence of Wants Suppose in the below example 1000 Mangoes 1 Necklace Farmer Grew Mangoes Jeweller sold Jewellery What if Farmer doesn’t need Necklace? What if Jeweler doesn’t need so many Mangoes? Is Barter System Possible? Barter System Possible Only if by chance Farmer Wants Necklace and Jeweler Wants mangoesThis is called Double Coincidence of Wants it means Both person should need each other's goods for Barter System to happen Problem 2 -Barter System Suppose in the below example 1000 Mangoes 1 Necklace Farmer Grew MangoesJeweller Sold Jewellery Now Jeweller is owner of 1000 Mangoes He takes a room on rent and Stores these 1000 Mangoes There is Storage cost of storing these mangoes In a room (if he had received money instead of mangoes, there would not be any storage cost) Problem 3 -Barter System Difficult to Carry forward one's wealth in Barter System Suppose in the below example 1000 Mangoes 1 Necklace Farmer Grew Mangoes Jeweller Sold Jewellery Now Jeweller is owner of 1000 Mangoes He saves it in his home for future generations After 1 Year, he dies His son becomes owner of wealth of Mangoes Now, Son tries to sell these Mangoes But Mango Stock get Spoiled ,cant be sold Difficult to Carry forward one's wealth in Barter System (not possible to transfer wealth to future generation) as goods are perishable Problem 4 -Barter System No Proper Unit of Account Suppose there are 3 persons A,B and C Who sell Watermelons, Apples and Oranges respectively Farmer A agrees to give his 1 Watermelon to get 3 Apples from B 3 Apples But Farmer A agrees to give his 1 Watermelon to get 4 Oranges 1 Watermelon 4 Oranges What is Price of Watermelon? It is 3 Apple per watermelon Or 4 oranges per watermelon There is no proper unit of account It is Difficult to measure how much quantity in exchange of another commodityProblem 5-Barter System Goods not acceptable to Other Person Example Suppose a Farmer sells Mangoes Customer is a Butcher who is willing to purchase Mangoes in exchange of chicken But Farmer is Vegetarian and doesn’t eat chicken? Mangoes Chicken Farmer Farmer Butcher He is Vegetarian (Doesn’t eat chicken) Barter System Not Possible If Goods of one person is not acceptable To other personProblem 6 -Barter System No Standard of Deferred Payment Example Suppose there are 2 Farmers Farmer 1 Grows Mango Farmer 2 Grows Wheat Both agree to exchange their crop with each other Crop of Mango is Ready But Crop of Wheat will take 3 months to be ready Mangoes (Given todayWheat (Given After 3 months) Farmer 1 Farmer 2 Problems in this Barter Transaction In this case Farmer 2 will make payment at later date (It is Deferred Payment) How much wheat will grow in farm? (No Standard quantity of Deferred Payment) What if Wheat crop gets damaged due to flood, drought etc? (No Standard quality of deferred payment) Problem 7 -Barter System Lack of Divisibility Example Suppose a Farmer has 100 Mangoes He wants to buy a horse But horse owner is willing to sell it only for 200 mangoes Can Farmer buy half horse with his 100 mangoes? 1000 Mangoes 1/2 Horse Farmer Horse Barter System Not Possible As Horse is not Divisible (Certain goods cannot be divided , hence barter system not possible) Summary of Problems with Barter System Double Coincidence of Wants (Both person should need each other goods or service) High Storage Cost (Product purchased or sold has to be stored in warehouse/godown) Difficult to Carry forward one's wealth (Some items are perishable, cannot be transferred to future generation) No Proper Unit of Account (No fixed price of a product, price varies with product exchanged) Not Acceptable to Everyone (Goods of One person may not be acceptable to other person) No Standard Deferred payment (If payment made at a later date, no standard quality/quantity) Lack of Divisibility (Certain Products cant be divided, have to be purchased in full)