In trade theory, the Barter system is a system by which goods and services are exchanged directly for good and services when there is no medium of exchange, for example, money.
Scottish economist Adam Smith describes the Barter system in his book The Wealth of Nations. He described the scenario of how the ancient bakers live without the exchange medium money.
Barter economy exist in the ancient period when there was no money as a medium of exchange. In modern days the system exists to some extent. For example, when your child breaks the neighbour’s vase you might gift them a new one. Sometimes the barter economy takes place in the adverse situation of a nation’s economy.
The barter system was first introduced by the Mesopotamian in 6000 BC.
Barter system depends on double coincident of wants to trade of goods. For instance, suppose you have bread, butter and milk for breakfast and you want to trade them to get pencils and coincidently the other person have pencils and want to have the breakfast materials. That means you need to find someone who is willing to exchange the goods you have as you are also interested to get their goods as well.
In a complex society, the barter system is inefficient as it is often hard to find someone to offer the things you have in return to exchange the things they have i.e. double coincident of wants.
“One can imagine an old-style farmer bartering with the blacksmith, the tailor, the grocer, and the doctor in his small town. For simple barter to work, however, there must be a double coincidence of wants … Henry has potatoes and wants shoes, Joshua has an extra pair of shoes and wants potatoes. Bartering can make them both happier. But if Henry has firewood and Joshua does not need any of that, then bartering for Joshua’s shoes requires one or both of them to go searching for more people in the hope of making a multilateral exchange. Money provides a way to make multilateral exchange much simpler. Henry sells his firewood to someone else for money and uses the money to buy Joshua’s shoes”.Joseph Stiglitz and John Driffill,