Barter (definition, theory, advantages and disadvantages)

It is known as barter to action where basically services, objects and articles are exchanged for others without the money being part of the transaction.

This exchange system consists of the delivery of one thing in exchange for another. It is one of the first modes executed by trade, when the currency did not yet exist, however, its negative factor is that it is usually impossible that the things that are exchanged can have the same value.

The exchange of services, legally it is not considered as barter. Its value is rather symbolic, according to the need for a certain capital value, which means that if some person has a house that does not live and wants to buy a car, it will give a capital value to the house, otherwise it will give it a value of need.

Economic theory of barter

The subjective theory of value provides the knowledge of the exchange that takes place in barter and also in the monetary economy. The exchange can only be carried out, when the two parties subjectively value what the other has, than what they really expect to give in exchange during the exchange.

The cost as part of the exchange is determined at the time it is carried out. The price that the two parties will reach for the exchange to take place will depend on their subjective evaluations. This means that the maximum price that the buyer is willing to pay must be higher than the minimum price that the seller is willing to sell.

In this simplified model, the price with only one bidder and one demander can be set in the range determined by these margins, with the theoretical difficulty of having an exact knowledge of what their value will be, only the agreements of the price.

In case the buyer's maximum value is less than the seller's minimum value, then the exchange will not take place. In this way, the exchange model will continue the unilateral competition models and in turn the bilateral competition model.

Historical background of barter

The historical antecedent of this model began with the Neolithic barter, once man was able to produce the excess of the goods that he had to consume, after having control of livestock and agriculture.

With the surplus assets, for the first time the situation arose that a group of individuals did not have the need to work the land anymore, so they dedicated themselves to do other activities, such as the production of ceramics and some other objects that they could later exchange with the farmers for a portion of their production.

In this way, barter led to division of work, which is about the internalization of Neolithic man, therefore it was no longer necessary for everyone to dedicate themselves to the livestock and agriculture, but rather favor the distribution of work in order to generate another type of goods.

When these new goods were presented on the market, this system favored the exchange of different tools that are manufactured such as shoes, flint, necklaces and spears, among others. In some parts of the world, today there are still some local markets where these exchanges have continued.

The Roman Empire, which was protected by Praetorian law, used barter in the form of a royal contract that ended once the exchange of the object took place. Later, when the coin appeared, the goods and services they began to be offered in exchange for them, which led to the exchange to the background.

Despite this, during the time of the economic crisis and of inflation, the frequency of this old system could be observed again, since money lost its purchasing value significantly.

Advantages and disadvantages of barter

This exchange system has a large number of advantages and disadvantages that will be detailed below.

Advantage

Among the most relevant advantages are:

• It allows you to purchase products or services without having to make monetary movements.
• Improves increased production.
• Temporarily compensates for the production variable, in order to gain more customers even if there is a low season.
• It reduces the accumulation of the quantity of products within the inventory and at the same time looks for the exit that provides an alternative that is profitable.
• Increase business relationships with different organizations in other sectors.
• Finds a way to find other commercial avenues for the company, without having to change the client agenda.
• It keeps the monetary capital of the company stable.
• It vastly improves the business finance system.

Disadvantages

In this system there are different disadvantages such as the following:

• It makes it difficult to exchange goods that have large differences in value.
• It generates certain difficulties when being sold in the present and bought in the future.
• Sometimes it is difficult to find the right person to exchange the exchange.
• The change in relation to the monetary value of the goods or services can create doubts in the decision, even when both parties are based on the existing market price.
• It can probably happen that the exchange benefits one of the two parties more economically, since the barter it is done mostly out of necessity.
• It does not allow the participation of intermediaries, unless he wants to do so knowing that he will not receive anything in return, therefore, it is a direct contact between the interested parties.
• It is not always simple or possible that the individual who wants to acquire the product or service that is offered to make the exchange can be obtained.