TRADE BY BARTER- MEANING, ADVANTAGES, DISADVANTAGES

Barter is the direct exchange of goods for goods and services for services. Barter is the exchange of goods and services without the use of money as a medium of exchange.

An economy that relies on barter is called a barter system or barter economy.

Generally, barter (or if you like, trade by barter) is done between two people.

However, trade by barter does occur multi-laterally. The key thing is that there must be a reciprocal exchange of goods and services.

Although it was mostly used in the olden days, trade by barter is still used in some countries today. This is particularly true for countries experiencing hyperinflation.

Advantages Of Trade By Barter

1. Ideal for hyper-inflationary economy: When there is hyperinflation, the inflation rate will rise at a far higher rate. With the increasing rate of inflation, the value of the currency becomes worthless. 

To guard against the galloping rate of inflation, people would need to resort to trading by barter.

Trading by barter ensures that they are not caught up in the value-eroding nature of hyper-inflation

Therefore, trade by barter is suitable in a hyper-inflationary economy.

2. No wastage: In trade by barter, the number of goods demanded usually equates to the quantity supplied. Hence, the market will be cleared as there will be no leftovers.

Recalled that surplus occurs when quantity supplied exceeds quantity demanded.

3. Simplicity: Trade by barter is very simple, it just involves a direct give and take of goods and services. No need for the complexities of the monetary system.

4. No real concentration of economic power: In a barter system, there is a limit to which goods and services can be stored.

Hence, the possibility that wealth will be concentrated in the hands of a few rich people is, to a large extent, eliminated.

This is one advantage that the barter system has over the monetary system as money can be easily stored.

Disadvantages Of Trade By Barter

1. Problem of double coincidence of wants: For a transaction to successfully take place, a double coincidence of wants is required.

In other words, what an individual wants to buy and sells must equal with want another individual wants to buy and sell.

For example, a teacher who requires rice must look for someone willing to exchange rice for some teaching services.

You will agree with me that this is time and energy-consuming. It is for this reason that the barter system did not succeed.

Many economies are now using money because money obviates this problem of double coincidence of wants

2. Lack of common measure: Even after surmounting the problem of double coincidence of wants, individuals will still be faced with the problem of lack of common measure.

Without a common measure, it will be difficult to strike a bargain as the two parties may disagree about what proportion of their two goods should be exchanged for fair trade.

For example, if a teacher wants rice and a farmer has rice and needs teaching services. How many hours of teaching will equal a bag of rice?

3. Not suitable for deferred payment: Deferred payment is the temporary postponement of the payment of a debt or bill.

Unlike the monetary system, the barter system does not provide a generally acceptable unit of exchange in which terms of deferred payment can be written.

This means that it will be difficult to defer payment in barter because there will always be disputes arising from the quality and nature of the goods to be repaid.

Furthermore, both parties engaging in trade by barter also risk the under-valuation or over-valuation of goods to be repaid.

For example, I lend you a bag of rice, and you promise to repay the rice with four bags of beans. If the value of beans increases in relation to rice, then it might pose a problem of wrong valuation as you might not want to repay with four bags of beans because the value of beans has increased.

Indeed, as a result of the interplay of demand and supply, rise and fall in the value of commodity are common in world economies. Hence, trade by barter is not suitable for deferred payment.

4. Indivisibility of certain goods: This is another major limitation to trade by barter.

Not all goods are divisible. As such, it may be difficult to exchange a bigger indivisible commodity for a smaller indivisible commodity.  

To illustrate, let's consider the case of a computer and build. Let's assume that the price of a computer is 200 bulbs. This implies that: if an individual is to exchange a bulb for a computer, one-two hundredth of the computer will have to be sacrificed.

You will agree with me that this transaction would not take place because dividing the computer into 200 pieces will destroy the utility that can be derived from it.

Therefore, it is difficult to exchange indivisible goods in the barter system

5. Problem of storing value: In a monetary economy, money acts as a store of value in that individuals can successfully transfer purchasing power into the future. 

This is not, however, possible in a barter economy. This is mainly due to just two reasons: Perishability of commodity and high cost of maintenance. 

Firstly, perishable goods like rice, beans and vegetables are used as a medium of exchange in the barter system. 

Perishable goods are goods that do not last for a longer period.

Since they don't last for a longer period, they can not successfully act as a store of value.

And if such commodities last longer, they would require high maintenance costs if they are to sustain their function as a store of value.

For example, you may have to expend a lot on cattle feed to keep your cattle functioning as a stable store of value. Otherwise, the value of the cattle will reduce.

Due to the inherent disadvantages of trade by barter, more economies are now turning to money as a medium of exchange. You will learn about money in the next post.

But, for now, we know that trade by barter has the drawback of double-coincidence of want, the problem of storing value, lack of common measure, not suitable for deferred payments and lastly not suitable for indivisible goods.

Can trade by barter operate successfully in modern economics? tell me your answer in the comment box.

Help us grow our readership by sharing this post

Related Posts

Post a Comment

Subscribe Our Newsletter