The following points highlight the six major disadvantages of the barter system. The disadvantages are: 1. Lack of Double Coincidence of Wants 2. Lack of a Common Measure of Value 3. Indivisibility of Certain Goods 4. Difficulty in Storing Value 5. Difficulty in Making Deferred Payments 6. Lack of Specialization.
Disadvantage # 1. Lack of Double Coincidence of Wants:
The functioning of the barter system requires a double coincidence of wants on the part of those who want to exchange goods or services. It is necessary for a person who wishes to trade his good or service to find some other person who is not only willing to buy his good or service, but also possesses that good which the former wants. For example, suppose a person possesses a horse and wants to exchange it for a cow. In the barter system he has to find out a person who not only possesses a cow but also wants a horse.
The existence of such a double coincidence of wants is a remote probability. For, it is a very laborious and time consuming process to find out person who want each other’s goods. Often the horse-owner would have to carry through a number of intermediary transactions.
He might have to trade his horse for some sheep, sheep for some goats and goats for the cow he wants. To be successful, the barter system involves multilateral transactions which are not possible practically. Consequently, if the double coincidence of wants is not matched exactly, no trade is possible under barter. Thus a barter system is time-consuming and is a great hindrance to the development and expansion of trade.
Disadvantage # 2. Lack of a Common Measure of Value:
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. Even if the two persons who want each other’s goods meet by coincidence, the problem arises as to the proportion in which the two goods should be exchanged. There being no common measure of value, the rate of exchange will be arbitrarily fixed according to the intensity of demand for each other’s goods. 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. Culbertson is n (n-1)/2. For example, if there are 100 different types of goods in a barter economy, then there would be 4950 exchange rates for it to function smoothly, i.e. 100( 100-l)/2=100×99/2 or 9900/2=4950.