Have you ever exchanged a lunch box at school or a baseball card in the playground as a child? Or a bowl of your special clam sauce for your neighbor’s apple pie? Or mowed your friend’s lawn in exchange if he repaired your car? Those were barters.
Bartering is a medium of trade in which goods and services are directly exchanged for other goods and services and the use of barter is not limited to individuals alone. Small, medium and large businesses, multinational corporations and even national governments are involved in barter trade on a day-to-day basis. In fact, the US Department of Commerce and the GATT both estimate that barter accounts for between 25% – 30% of all transactions world-wide.
During ancient times people were unable to buy goods from other people with money. There was no money. They used barter. Barter was the exchange of personal possessions for other goods that people wanted. This kind of exchange started at the beginning of humankind and is still used today. From 9,000-6,000 B.C., livestock was often used as a unit of exchange. Later, as agriculture developed, people used crops for barter. For example, I could ask another farmer to trade a pound of peaches for a pound of bananas or apples.
Slowly the disadvantages of the system were realized and money replaced barter.
Disadvantages of Barter
The lack of double coincidence of wants: Barter depends on the coincidence of wants. If you have bananas and want to trade or barter them for apples you have to find someone who has apples and is willing to trade them with bananas. This was not always possible.
Lack of common measures: there are not fixed measure for trading equipment. A liter of milk might not have the same value as one dozen of bananas or a pound of cement or one hour of work on a farm. So there was no system to keep a measure and so one or another party may suffer.
Lack of divisibility: imagine you need wheat, cotton and rice and have a horse to trade. It’s not necessary that you will be able to find one person with all the three commodities. But you only have one horse to trade that you can’t divide in three.
Barter Networks and problems of barter
With the presence of barter networks today the disadvantages of barter have been resolved. These organisations use the latest software and technology to make barter transactions very similar to those of money – with the added benefit that when money is in short supply you can still buy and sell what you need.
A barter exchange acts as a marketplace and a record keeper for barter deals and solves the problem of lack of double coincidence of wants, lack of common measures and lack of divisibility. They provide opportunities of multilateral barter which helps clears the issue of finding someone to directly trade with. They use barter dollars as a measure and hence the problem of a common measure and lack of divisibility are resolved.
Rather than being limited to one-on-one trading, the network opens up possibilities to trade with more than one business, or, to sell to one business and use the value of that sale to buy from another. The exchange itself organizes three, four and multi-way transactions to ensure that there is a balance in the system. For the user, however, it is very much akin to using cash – except, of course, that the barter exchange helps find you both customers and new suppliers, and often at a lower cost than you would incur doing it yourself.
Modern barter networks have resolved the problems and disadvantages of the traditional barter setup and made it a modern day concept.
Brought to you by Neha Gupta
Ormita Australia Limited