In a free economy, The difficulties faced when using the barter method of trading.
1. Lack of Double Coincidence of Wants and Exchange:
Double coincidence of wants refers to buyers and sellers fulfilling mutual desires at the same time.
When two people require items that are in the ownership of the other. There’s no certainty that a double coincidence of desire will occur.
Consider the case of a person who has rice and wishes to swap it for sugar. In the barter system, he must locate someone who not only has sugar but also wants ricey; prices are set by the pricing mechanism, which is driven by market forces of demand and supply.
2 .There is a lack of a common measure of value:
Even if two persons who want each other’s commodities happen to meet by chance,
the difficulty of determining the proportion in which the items should be transferred occurs. Because there is no universal measure of worth, the exchange rate will be determined arbitrarily based on the strength of demand for each other’s commodities.
In the terms of commerce between the two items, one side is at a disadvantage.
3.Lack of Divisibility:
When a large indivisible commodity is exchanged for a smaller commodity in the lack of a common medium of exchange, a difficulty develops.
For example, if a horse costs the same as five sheep, a person with one sheep cannot swap it for the horse since the horse cannot be divided into little parts.
4.The Value of Storing Wealth:
The value of stored goods may fluctuate over time. These items may expire after a period of time.
Second, storing certain commodities for an extended period of time is quite costly. Finally, riches accumulated in the form of specialized things might breed envy and resentment among neighbors or relatives.
5.Lack of a Deferred (Future) Payments Standard:
Barter trade makes it difficult to conduct credit transactions that require future payments. In this case, there are three major issues. These are the ones.
a. It may raise questions about the quality of products or services to be reimbursed in the future.
b. The two parties may be unable to reach an agreement on the precise commodity to be used as payment.
c. Both parties risk the future value of the commodities to be returned increasing or decreasing.
Final Answer:
Money did not exist in man’s early past. Because each household was self-sufficient, there were little exchanges. Whatever trade there was, it was in the form of barter, or the exchange of one good for another. People in the barter economy faced a variety of challenges.