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What is Barter System? Definition, Examples, Benefits, Limits

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  • Difficulty Level : Basic
  • Last Updated : 12 May, 2022
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Barter is the trade of goods or services between two or more people that does not include the use of money or a monetary device such as a credit card. Trading is defined as one party providing one good or service in exchange for another party providing a different good or service. A simple example of a barter relationship is a carpenter who builds a fence for a farmer. Instead of paying the builder $1,000 in cash for labor and supplies, the farmer may reimburse the carpenter with $1,000 worth of produce or groceries.

Concepts involved in Barter

The underlying idea behind bartering is that two people negotiate the relative value of their commodities and services and then exchange them in an equal exchange. It is the oldest form of commerce, dating back centuries when real money existed. While the present generation bartered with the few things they had on hand or services they could physically deliver to someone they knew, the internet now gives most Americans access to a virtually endless pool of potential bartering partners.

Almost any good or service can be bartered if both parties agree on the parameters of the transaction. Individuals, businesses, and governments can all profit from cashless transactions, especially if they lack sufficient hard currency to purchase goods and services.

Benefits of Barter

  1. Individuals can use trade to exchange products they already own but aren’t using for items they need, while still keeping cash on hand for requirements that bartering cannot cover, such as a mortgage, medical bills, or utilities.
  2. Because it allows trading partners to form a more intimate bond, bartering has a psychological edge over traditional commercialized transactions. Bartering can also help with professional networking and business marketing.
  3. Bartering, can result in the most effective use of resources by exchanging things in equal quantities and can also help economies establish equilibrium, which occurs when supply and demand are balanced.

How do entities barter?

People: When two people have items that the other person desires, they can assess their worth and provide the amount that results in the best resource allocation. For example, if someone has 20 Rupees in rice that they value at Rs 10, they can exchange it with someone who needs rice and has something worth Rs 10 that the person desires. A person may also trade an item for something he or she no longer requires if there is a market for it.

Companies: If a corporation does not have the credit or cash to buy the goods, it may choose to barter them for other items. It is a cost-effective trading strategy since foreign exchange risks are avoided. The trading of advertising time or space is the most popular modern type of business-to-business barter transaction; it is typical for smaller enterprises to trade the rights to advertise in each other’s commercial venues.

Countries: When a country is deeply in debt and unable to secure financing, it resorts to bartering. Exports are exchanged for goods needed by the country. This enables countries to better manage their trade deficits and debt levels.

Limits of Bartering

Bartering is not without drawbacks. Even small firms may limit the amount of cash they will exchange for goods or services—they may refuse to commit to a 100 percent barter arrangement and instead insist on at least partial payment. Some non-bartering businesses trade goods and services via membership-based trading exchanges such as ITEX or International Monetary Systems (IMS). Users can exchange barter money with other members for a fee by joining a trading network.

Sample Problems

Question 1: What is barter system?

Solution:

Barter is a method of exchanging goods that does not include the use of money.

Question 2: Differentiate between money and barter system?

Solution:

Money is a medium of exchange, whereas in the barter system, one type of good is swapped for another sort of goods instead of money. Wealth cannot be carried forward under the barter system since surplus rice cannot be stored for lengthy periods of time due to the commodity’s perishability.

Question 3: What is double coincidence of wants?

Solution:

The coincidence of wants is an economic phenomenon in which two parties each own an item that the other seeks and exchange these things without using money.

Question 4: What is legal tender?

Solution:

Legal tender is money that is required by law to be accepted as payment for any monetary debt. Legal tender is defined differently in each jurisdiction, but it is defined as anything that, when offered in payment of a debt, extinguishes the debt.

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