The barter system is one of the oldest systems of exchange between two parties. Despite having been around for so long, the system is still relevant, and in use today. In this article, we will discuss the advantages and disadvantages associated with the barter system. Let’s begin by understanding bartering in a little more detail.
What is a Bartering/Barter System?
Bartering is a simple system of cashless trading in which two parties directly exchange goods or services without the use of physical money. Although it may conjure up images of medieval marketplaces, bartering is nevertheless prevalent in today’s monetary economy, usually in the form of exchanging space, services, or materials.
For example, a design agency might give a branding consultancy in exchange for production work without any money paid.
Previously, this technique only applied to those who lived in the same area, but today, the barter system is used all over the world, especially in developed countries. Bartering today is not the same as it was in the past.
Following the international foreign exchange crisis, the internet barter exchange system gained popularity among small businesses. Modern bartering provides a flexible means of exchanging goods and services by utilizing trade pounds like distinct currency, tokens, and plastic cards.
Like every system and practice, the barter system has its advantages and disadvantages. Let’s take a look at them in the following sections.
So what are the advantages and disadvantages of bartering? Let’s find out.
Advantages of Bartering
1. Simplicity
Simplicity is one advantage of bartering that can not be ignored. The numerous complexities embedded in the modern monetary system cannot be disregarded, no matter how efficient it is. On the contrary, bartering doesn’t involve any threat as it doesn’t depend on a standard monetary system. The barter economy entails a direct exchange of goods. It’s a basic method without the complexities of today’s monetary systems.
So, if a rice vendor wanted to buy grain, he would simply find a grain merchant and swap the goods without the involvement of any monetary medium. As a result, there are no obstacles, and trade may be carried out easily.
2. High Flexibility
Flexibility is one of the advantages of the barter ecosystem. You can swap one related item for another, such as a laptop for an Ipad, or two completely unrelated goods, such as a television for a vacuum cleaner. You can also save money on travel by sharing houses with friends, allowing them to stay in your home while you occupy their cottage or property for fun or work.
Instead of actual objects, you may barter with and for services. Alternatively, you may trade material products or other aid for maintenance, construction, or other services.
4. Utilize surplus inventories and second-hand equipment
Barter trades are frequently perfect for businesses looking to get rid of excess inventory or obsolete equipment (machines, furniture, etc.) while still making a profit. They can trade their unwanted goods and equipment for credits that can be used to purchase useful products and services from other members of the network.
5. Cash Savings
Bartering allows small and new businesses as well as small companies to have more cash on hand, which is especially critical for start-ups.
6. Ideal for highly inflationary economies
Hyperinflation presents complex problems and causes inflation to climb at a much faster rate. The worth of the money currency depreciates as the rate of inflation rises.
People would have to turn to barter to combat the skyrocketing rate of inflation. They would be wrapped up in the value-eroding character of hyperinflation if they traded via barter.
Challenges of Bartering
1. A double coincidence of wants
A double coincidence of wants between two parties is required for a barter trade exchange to take place in the barter system. In other words, what a person wants to purchase and sell must be the same as what another person wants to buy and sell.
A person seeking lumber, for example, is open to trading his rice for them. Now the lumber seeker needs to find someone who wants rice and has lumber to exchange for it. Finding a perfect match every single time may prove to be difficult. However, thanks to the internet, the likelihood of finding a perfect barter partner has increased manifold.
2. Determination of value
Even if people with similar requirements meet, there is still the question of how much of one good must be traded for another. It might be tough to determine and match the worth of one object to another while exchanging. Most of the time, a common measure of value is missing.
For example, in return for someone else gardening your yard, you supply auto repair services. In general, clarifying what is covered in both takes more debate than simply trading money for services. Once again, the web solves this problem. Nowadays, people engaged in barter exchanges have access to a wealth of knowledge and data that can help them ascertain the value of a particular item or service. It is also possible to evaluate the value of barter items or services by looking up their monetary value online.
3. Indivisibility of certain products
It is another key barter trade constraint. Not all goods can be divided. As a result, exchanging a larger indivisible commodity for a smaller indivisible item may be problematic.
Consider the instance of a computer with electricity as an example. Assume that a computer costs 200 lights. This means that if a person wants to replace a bulb with a computer, they will have to forfeit one-two hundredth of the computer.
Such a deal will not take place because splitting a computer into 200 pieces would eliminate the utility it might provide. As a result, exchanging indivisible things under the barter trade exchange is difficult. However, since it is possible to interact with hundreds of potential buyers and sellers online, this problem can be overcome with a little bit of patience and effort.
4. Market restraints
If you have a highly valued object or service, numerous people may “buy” it with trade credits if you’re using barter exchanges.
If others do not give what you require, you may be able to accumulate a large lot of trade credits. Because barter transactions are self-contained, your credits are virtually worthless if you cannot find something you want on that exchange.
5. Transportation difficulty
Another issue with the barter system is that products and services cannot be easily transported (especially perishable goods) from one location to another. For example, transporting a television set or a pile of wheat to a faraway market to be exchanged for other items is difficult and dangerous.
Having said that, no matter what you buy, where you buy it from, and what medium of exchange you use to pay for your purchase, the logistics factor is always a consideration. The cost of transportation can often be factored into a barter exchange.
6. Deferred payments are not possible
Deferred payments refer to the postponement of a loan or bill payment. In a barter exchange, however, the promise of future payback is not easily manageable and might lead to a variety of disputes. According to an economist, these conflicts could include:
- Disagreements about the quality of the material items to be repaid.
- A rise in the prices of commodities over time might spark debate.
- Inability to reach an agreement on the type of commodities to be utilized to meet the obligation.
If, however, you are someone who does not like to get involved in the complexities surrounding deferred payments, bartering is perfect for you.
Conclusion
The barter system is used by businesses of all sizes to eliminate monetary transactions with the other party.
While barter trade provides benefits for both large and small firms, it also offers certain disadvantages that business owners should be aware of.