Barter means to trade by exchange of products without using money to value the products. Barter 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. These values can be different to different parties. When three parties enter into an exchange, then it is called a triangular barter. If more than three parties enter the exchange then it is called multilateral barter.
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.
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, this exchange deal may even lead to unequal trade. This problem is addressed by use of currency.
Apart from this, exchange needs presence of double coincidence of wants. In the example, person B may not enter the exchange deal if he feels that he does not need the watch. Some other limitations of this system are the lack of standards for deferred payments and difficulty in storing wealth.
Hence, this concludes the definition of Barter along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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