Meaning and definition of Barter
Barter can be describes as an act of trading goods and services between two or more than two parties without involving the use of money. Bartering is beneficial for a companies and countries that see a mutual benefit in exchanging goods and services instead of cash, in addition to enabling those who are short of hard currency to obtain goods and services. The barter system is generally bilateral, but might also be multilateral, and by and large exists parallel to monetary systems in most developed countries, although to a very limited extent.
In times of monetary crises, the barter system replaces money as the mode of exchange, like when the currency might be either unstable or simply unavailable for conducting commerce. As expressed by Investopedia, an example of barter system would be if someone built a fence for a cattle farmer in exchange for food. Instead of paying $1,000 for the fence, the farmer would rather give the builder a similar value in beef.
Advantages and disadvantages of Barter
Some of the advantages of Barter system are:
- It is a simple system free from the complex problems of the modern monetary system.
- The problems of international trade, like foreign exchange crisis and adverse balance of payments, do not exist in the barter system.
- Personal and natural resources are perfectly utilized to meet the requirements of the society without involving any wastage.
Besides the above mentioned advantages, there are also certain disadvantages to the system. These include:
- Absence of common measure value
Money plays the role of a measure of value of all goods in a monetary economy thus being helpful in measuring their values against each other. This role might be absent in a barter economy.
- Invisibility of certain goods
A barter transaction cannot occur if an individual wants to buy a certain amount of goods but only has single invisible unit of another good which is worth more than what the individual wants to obtain.
- Lack of standards for deferred payments
This drawback is associated with the absence of a common measure of value, even though if the debt is denominated in units of the product or service that will be used eventually in payment, it is not a problem.
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