Question

State three limitations of Barter system of Exchange.

Hint:

These limitations of the barter system directly correspond to the primary functions of money. Money solves these problems by acting as a medium of exchange, a unit of account, and a store of value.

Answer 1

Step 1: Understanding the Concept:
A barter system is a system of exchange where goods and services are directly exchanged for other goods and services without using a medium of exchange, such as money. The question asks for its major drawbacks.

Step 2: Detailed Explanation:
Three major limitations of the Barter system of exchange are: \begin{enumerate}[label=\arabic*.] \item Lack of Double Coincidence of Wants: \begin{itemize} \item This is the most significant problem. A transaction can only occur if two individuals each have a good that the other wants. \item For example, a person with a surplus of wheat who wants shoes must find another person who has a surplus of shoes and wants wheat. The simultaneous fulfillment of these mutual wants is rare, making trade very difficult and time-consuming. \end{itemize} \item Lack of a Common Measure of Value: \begin{itemize} \item In a barter system, there is no common unit of account to measure the value of goods and services. \item It is difficult to determine the exchange ratio between different goods. For instance, how many kilograms of wheat should be exchanged for one pair of shoes? This makes accounting and valuation extremely complex. \end{itemize} \item Difficulty in Storage of Value and Deferred Payments: \begin{itemize} \item It is difficult to store wealth for future use in the form of goods like grains, vegetables, or cattle. These goods are perishable, require large storage space, and can lose value over time. \item Similarly, making contracts for future payments (deferred payments) is problematic. The value of the good to be repaid in the future might change, or the good itself might perish. \end{itemize} \end{enumerate}

Step 3: Final Answer:
Three limitations of the barter system are the lack of double coincidence of wants, the lack of a common measure of value, and the difficulty in storing value.