Category: Barter
The Advantages and Disadvantages of the Barter System
Written by admin
Tuesday, 23 July 2013 15:45
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Post Courtesy of APARIJITA SINHA

Money is something which is generally accepted as a medium of exchange. It is one of the most basic and significant inventions of mankind. Before money came into use, exchange took place through barter system, i.e., goods were exchanged for goods.

Barter means direct exchange of goods. In other words, barter refers to exchanging of goods without the use of money. For example, corn may be exchanged for cloth, house for horses, bananas for oranges and so on.

What are the advantages of Barter System?

i. It is a simple system devoid of the complex problems of the modern monetary system.

ii. There is no question of over or under-production (or of unemployment or over-hill employment) under the barter system since goods are produced just to meet the needs of the society.

iii. The problems of international trade, such as, foreign exchange crisis, adverse balance of payments, do not exist under barter system.

iv. There is no problem of concentration of economic power into the hands of a few rich persons under the barter system because there is no possibility of storing the commodities.

v. Personal and natural resources are ideally utilised to meet the needs of the society without involving any wastage.

vi. The barter system also reaps the benefits of division of labour because it represents a great step forward from a state of self- sufficiency hi which every man has to be a jack of all trades and master of none.

What are the difficulties of Barter System

Barter system involves various difficulties and inconveniences which are discussed below:

1. Double Coincidence of Wants:

Under barter system, a double coincidence of wants is required for exchange. In other words, the wants of the two persons who desire to exchange goods must coincide. For example, if person A wants to acquire shoes in exchange for wheat, then he must find another person who wants wheat for shoes.

Such a double coincidence of wants involves great difficulty and wastage of time in a modern society, it rarely occurs. In the absence of a double coincidence of wants, the individuals under barter system are compelled either to hold goods for long periods of time, or to make numerous intermediary exchange’ ii order to get finally the goods of their choice.

2. Absence of Common Measure of Value:

Even if it is possible to have the double coincidence of wants, the absence of a common measure of value creates great problem because a lot of time is wasted to strike a bargain. Since there is no common measure in terms of which the value of a commodity can be expressed, the problem arises how much wheat should be exchanged for how many pairs of shoes.

In fact, under the barter system, every good must be expressed in terms of every other good. If, for example, there are 1000 goods in the economy, then, in the absence of monetary unit, every good can be exchanged for the remaining 999 goods. What is true for one good will be true for all other 999 goods.

3. Lack of Divisibility:

Another difficulty of barter system relates to the fact that all goods cannot be divided and subdivided. In the absence of a common medium of exchange, a problem arises, when a big indivisible commodity is to be exchanged for a smaller commodity. For example, if the price of a horse is equal to 10 shirts, then a person having one shirt cannot exchange it for the horse because it is not possible to divide the horse in small pieces without destroying its utility.

4. The Problem of Storing Wealth:

Under a barter system, there is absence of a proper and convenient means of storing wealth or value, (a) As opposed to storing of generalized purchasing power (in the form of money) in a monetary economy, the individuals have to store specific purchasing power (in the form of horses, shoes, wheat etc.) under the barter system which may decrease in value in the due course of time due to physical deterioration or a change in tastes, (b) It is very expensive to store specific goods for a long time, (c) Again the wealth stored in the form of specific goods may create jealousy and enmity among the neighbors or relatives.

5. Difficulty of Deferred Payments:

The barter system does not provide a satisfactory unit in terms of which the contracts about the deferred (future) payments are to be written. In an exchange economy, many contracts relate to future activities and future payments. Under barter system, future payments are written in terms of specific goods. It creates many problems. Chandler has mentioned three such problems:

(a) It may create controversy regarding the quality of goods or services to be repaid in future,

(b) The two parties may be unable to agree on the specific good to be used for repayment.

(c) Both parties run the risk that the goods to be repaid may increase or decrease in value over the period of contract.

6. Problem of Transportation:

Another difficulty of barter system is that goods and services cannot be transported conveniently from one place to another. For example, it is not easy and without risk for an individual to take heaps of wheat or herd of cattle to a distant market to exchange them for other goods. With the use of money, the inconveniences or risks of transportation are removed.

 
Introduction to Barter
Written by BarterPro
Sunday, 11 November 2012 10:45
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Retail Barter

Small business owners conduct barter transactions through membership in commercial trade exchanges. Most members do business within a 35-mile radius.  Their business revolves around services – everything from chiropractors, attorneys, graphic designers, and plastic surgeons to mom-and-pop businesses like dry cleaners and shoe repair.

There are 400 commercial barter exchanges in the U.S. and another 200 worldwide.  The number of members per exchange ranges from about 200 to about 10,000, with most under 1,000.  In total, the business-to-business network of barter exchanges represents over 450,000 companies.

Under the Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA), trade exchanges are classified as third-party record-keepers with the same fiduciary responsibilities as bankers and securities brokers.

Corporate Trade

Larger companies trade goods and services through accounts receivable (AR) trading, relying on a corporate barter company to purchase inventory offered for sale with trade credits and subsequently to fulfill the credits by providing goods and services requested by the seller.  The corporate barter company acts as a principal in the barter transaction, buying and selling for its own account and becoming the purchasing agent for clients with regard to the use of their trade dollars.  About seven to ten corporate barter companies do about 95 percent of the corporate trade business.

Corporate barter as it is practiced today originated in the late 1960’s. At that time, corporate barter was primarily a financial tool – a way for companies with excess or obsolete inventories to recover costs and even full wholesale value for their inventories. Today, corporate barter both remains a profitable alternative to markdowns or liquidation and provides a valuable way to expand a company’s advertising and marketing plan using the leverage of a barter transaction. Corporate barter also facilitates foreign trade with countries that have goods and services to exchange but no hard currency.

Examples of corporate trade are numerous: unfilled trucking on return trips, idle plant equipment, excess maintenance inventory, years on a lease when a company moves, and even stock in a firm. Privately held companies sell restricted stock for trade dollars to offset marketing costs that will help build name recognition and market share, to build trade dollar reserves or to purchase hard assets such as real estate.

 
Why Businesses Barter
Written by BarterPro
Sunday, 11 November 2012 10:30
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The Department of Commerce says that barter in its various forms accounts for about thirty percent of the world’s total business. The International Reciprocal Trade Association (IRTA) recently announced that U.S. barter transacted through commercial barter brokers exceeds $14 billion annually. Over 450,000 U.S. businesses actively use organized barter.

There are many good reasons why more and more businesses worldwide are bartering their products and services, but underlying them all is one fundamental business motivation; businesses profit.

Airlines and restaurants can fill empty seats, hotels and resorts can fill empty rooms, printers can fill press downtime, professionals can fill empty time slots, health care professionals can treat new patients. Business owners and professionals can then take this newfound revenue and reduce cash expenses or expand their operations.

Businesses across America are taking a serious look at barter as a way to build their bottom line, and the rapid growth of the online barter industry can only mean that American business likes what today’s barter industry has to offer.