Limitations of Barter Exchange

Barter System can work when there exists ‘Double Coincidence of Wants'-

Meaning of Barter Exchange refers to exchange of goods for goods. An economy, where there is a direct barter of goods and services, is called a ‘Barter Economy’ or ‘C-C Economy’ (where C stands for commodity). For example, when a farmer gives wheat and gets cloth from the weaver in return, it is known as barter exchange.

Double Coincidence of Wants refers to the simultaneous fulfillment of mutual wants of buyers and sellers. In the above example, want for clothing by the farmer coincides with the want of weaver for wheat. However, it is very difficult to find double coincidence of wants in real life. It leads to huge ‘Trading Costs’. With rise in economic activities, the exchange through barter became more difficult and complicated. Let us discuss the various limitations Swap Products of Barter Exchange.

The major limitations of Barter Exchange are:

1. Lack of Double Coincidence of Wants:

Barter system can work only when both buyer and seller are ready to exchange each other’s goods. For example, A can exchange goods with B only when A has what B wants and B has what A wants. However, such double coincidence is very rare.

2. Lack of Common Measure of Value:

In the barter system, all commodities are not of equal value and there is no common measure (unit) of value of goods and services, in which exchange ratios can be expressed. For example, if A has wheat and B has rice, then it is difficult to decide, how much wheat is needed to exchange with one kilogram of rice. In the absence of common measure, the exchange ratio is fixed randomly, in which one of the party generally suffers.

Barter system can work with few commodities in the primitive society. However, it is very difficult in the modern economy, where we need millions of exchange ratios for a large number of goods and services.

3. Lack of Standard of Deferred Payment:

Under barter system, contracts involving future payments or credit transactions cannot take place with ease because of following reasons:

(a) The borrower may not be able to arrange goods of exactly same quality at the time of repayment.

(b) There may be conflicts regarding which specific commodity is to be used for repayment.

(c) The commodity to be repaid may lose or gain its value at the time of repayment.

So, it is very difficult to make deferred payments in the form of goods.

4. Lack of Store of Value:

Under barter system, it is difficult for people to store wealth for future use because:

(a) Most of the goods (like wheat, rice, vegetables, etc.) do not possess durability, i.e. their quality deteriorates with passage of time.

(b) Storage of goods requires time and efforts.

As a result, goods cannot be used to store the earnings for a long period.

With so many difficulties, barter exchange could not continue for a long time. As a result, it was replaced by monetary exchange, i.e. buying and selling of goods with the help of ‘Money’. Money has been defined differently by different economists. The most acceptable definition of money can be stated in terms of all the functions of money. So, let us first discuss the main functions of money.

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Benefits of Barter

INCREASE SALES:

Barter promotes your business to thousands of businesses in the barter network who are all potential customers, and helps you add on extra business over and above your existing customers. Businesses use barter to purchase different products or services that they need or want with our interest free trade credit and pay for their purchases with their goods or services.

PRESERVES CASH:

Saving Cash is the primary principle of Barter. Barter permits you, as a business person, to pay for what you need with your own goods or services, This helps you to conserve cash and working capital for other priorities. Purchasing with your Barter Trade Credits means that payment is made with sales done to new customers from the network.

Bartering helps reducing cash flow, overhead cost and operational costs. Several services offered through barter like Housekeeping, travel, advertising, accounting services etc relate to your overhead costs. Getting these services through barter helps you save cash. Businesses always need cash and barter always helps in preserving your cash.

INCREASE PROFITS:

Businesses in the Network make additional Sales within the network this means over and above your regular sales.This helps you in adding on new customers and adding new customer means more sales, hence more profit. Over and above that, the actual cost of the products or services you purchase on barter are actually the bulk cost of your Barter Trade Credits earned

EASILY ADD NEW CUSTOMERS:

Barter members can cost-effectively expand their reach by marketing their products or services to the barter network members. The large customer base of members provides a large market and a range of trading options.

INCREASE YOUR PURCHASING POWER:

Swap Products with barter the actual cost of the products or services you purchase on barter is actually the wholesale price of your Barter Trade Credits earned. Generating sales with built-in profits makes the cost of your purchases more economical on Barter. When you join a barter network, you open the door to a new, cash-less way of handling your business and expenses.

SURPASS YOUR COMPETITORS:

Barter helps you to expand your customer base,generate additional sales, improve cash liquidity and increase profits,thus surpass your competitors and gain a winning edge. Bartering through a Barter trade Network can help a small business to portray the image of being a big business without the cash-costs incurred by much larger businesses.

IMPROVE YOUR INVENTORY MANAGEMENT:

Bartering allows you to effectively improve your inventory management by converting excess inventory into valuable products or services. If you barter, you avoid having to liquidate excess inventory through drastic discounting. If your small business experiences seasonal markets, barter provides a profitable way to use the inventory on a regular basis. Barter provides a system to put that excess to use in profitable ways. Barter accomplishes this objective by matching your products or services with businesses looking to purchase them on trade.

HELPS YOU PURCHASE AT A DISCOUNT:

In many cases what businesses want is stronger purchasing power.

Members of a barter network sells their products or services to earn barter trade credits. By calculating the cash cost of obtaining barter trade credits, you can figure out the leverage or purchasing power of trade for your business.

The cash cost of each trade credit is the cash you directly have to spend to earn that credit. It is a combination of your cost of goods sold and the trade fees that trade credit costs you to get and spend.

How much more purchasing power do you have when you are buying with trade credits? By leveraging your new source of income you are essentially buying everything you get on barter at approximate 20% - 40% discount.

HELPS INCREASE PRODUCTIVITY:

Barter helps companies put inventory, equipment and employees to effective and efficient use, creating new revenue that would not have been available otherwise. That new revenue can be used to finance the purchase of new equipment, raw materials or services to support the business. Essentially, a company’s less productive assets are exchanged for more valuable goods or services through the help of a barter exchange.

IT DEVELOPS INCREMENTAL REVENUE:

Businesses with obsolete or idle inventory frequently find that bartering the assets yields a much better value than liquidating it for paise on rupee. Instead, the company can sell the inventory to a barter member for trade credits close to the book value, and then apply those credits to other business expenses, such as marketing, entertainment, travel or raw materials. Exchanging an unwanted asset for something else of value helps recover a significant amount of incremental revenue that might otherwise have been lost.

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Barter System Advantages And Its Difficulties

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.

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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.

Advantages of Barter System-

• It is a simple system devoid of the complex problems of the modern monetary system.
• 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.
• The problems of international trade, such as, foreign exchange crisis, adverse balance of payments, do not exist under barter system.
• 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.
• Personal and natural resources are ideally utilized to meet the needs of the society without involving any wastage.
• The barter system also reaps the benefits of division of labor 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.

Difficulties of Barter System-

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

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.

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.

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.

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.

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:

1. It may create controversy regarding the quality of goods or services to be repaid in future,
2. The two parties may be unable to agree on the specific good to be used for repayment.
3. Both parties run the risk that the goods to be repaid may increase or decrease in value over the period of contract.

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.

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