Barter economy is where goods are exchanged for goods rather than using money to perform transactions. Barter economy existed in the past where there were no money was used in economies. The barter system focused on making use of specialization. As an example a farmer was specialized in farming and he produced food which resulted in “surplus” of food. The surplus of food was exchanged with another producer who made different kind of good.
Even though barter economy looked very simple it had many issues such as:
The double coincident of wants was not present-
This is was the worst problem of the barter system where people had to find a people who are willing to sell and buy what they want and what they have. As an example, a farmer who wanted to sell rice and wanted to buy clothes had to find a person who wants to sell clothes and buy rice. Finding such buyers and sellers with coincidence of needs was impossible.
Valuation of goods-
There was no standard valuation method for goods and people did not know how much to exchange. Sometimes people exchanged rice for lands which is quite strange under the monetary economy. Since money was not present there was no balance left from a transaction.
Indivisibility of goods-
Since goods to goods were exchanged people had no choice but to give/take all what is presented by the other party. There was no division of goods and no balance after the transaction is performed. As an example a person who wanted a sack of rice may have give up a cow which can not be divided into pieces.
The problem of storage
Most goods used in transactions were perishable. People could not store those and use it later when they were in need. As an example a farmer who manufactured vegetables could not store those vegetables for a long time period as they got perished and did not have an alternative means for storage.
The problem of transportation
The goods which were intended to be sold had to be taken to a potential buyer and the transaction cost and the effort was higher than the good itself. As an example a cow which is intended to be sold had to be taken to a potential buyer who offers what is expected by the seller.
As a result the monetary system was introduced which used uses money to perform transactions. (To read more about characteristics of money please click here)