Answer each of the following questions in a paragraph:

What are the difficulties of Barter System of exchange? How has money solved these problems?

Barter System of exchange in an important step in the evolution of commerce in any economy. During this step, money is not used as a medium of exchange in the economy. The distribution of goods and services occur when there is a direct exchange of goods and services for similar objects. Although essentially this form of exchange introduced the concept of business in the economy, it has several problems which have been discussed below:

• Lack of double coincidence of wants: it is rare to find two parties with exactly the need for the goods that are being offered for exchange. If such two parties exist, it is called co-incidence of wants and this double coincidence is rare. For example, party ‘A’ has wheat and wants paddy. Party ‘B’ has paddy but wants cotton instead of wheat. This proved to be the main disadvantage of the system.

• Lack of common measure of value: different goods are never of similar value. This makes it difficult to ascertain the ratio of exchange. Party ‘A’ may consider that one cow is worth 5 sheep, while party ‘B’ may consider 5 sheep to be worth 2 cows. This hindered the process of exchange.

• Difficulty of sub-division: even if a ratio of exchange is established, it is sometimes impossible to subdivide goods as per the ongoing ratio. A cow may be equal to 10 hens. But the person with the cow cannot exchange one part of the cow for one hen which is his requirement. This causes loss of value.

• Difficulty in storing the goods or in transporting: certain goods particularly perishable ones lose their value over time. It is difficult to store them and exchange for a profit. Without proper storage or the ability to transport over long distances, the owner of such goods is often forced to exchange them at a loss.

To address these difficulties, commerce further evolved to include the use of money. It became a common measure of value which allowed comparison of different commodities. When money converted to paper form from metal, it could be easily carried and exchanged. It allowed the formation of credit as goods and services could be exchanged for cheques, card payments etc. it was also issued by a central authority and provided governmental validation. It promoted the further growth of commerce at a faster pace.