Posted in Marketing and Strategy Terms, Total Reads: 1313
The word barter means to trade by exchange. Barter involves direct exchange of goods and services without the use of money. It is conducted either based on exchange rates or by bargaining. Barter can take place within a group (intra) as well as between groups (inter), although most of it is intra-group.
There are different forms of barter. It happens on the basis of the perceived value to the parties to the barter. These values can be different to different parties.
A person A, who is very hungry, may exchange his wrist-watch with person B who has an extra food packet. Even if the wrist watch is more in terms of monetary value, the value of food perceived by person A is more than the wrist watch. For person B, food packet is extra and he perceives the value of the wrist watch more than the food packet. Hence, the parties to the barter (Person A and Person B) exchange the goods (Food and wrist watch) on the basis of the values perceived by them, without intervention of money.
When three parties enter into barter, then it is called a triangular barter. If more than three parties enter the barter then it is called multilateral barter.
Sometimes barter may be impractical and may consume a lot of time and work. One of the biggest problems in barter is on decision about equal trade.
In the previous example, a watch may be too expensive for a packet of food. However, it is not possible to exchange a part of the watch for the packet of food. Hence, person has to forgo the entire watch for the food packet. Hence, barter may even lead to unequal trade.
This problem is addressed by use of currency.
Apart from this, barter needs presence of double coincidence of wants.
In the example, person B may not enter the barter if he feels that he does not need the watch.
Some other limitations of the barter system are the lack of standards for deferred payments and difficulty in storing wealth.