Barter is a trade strategy which involves directly exchanging goods and services without the use of money or any other standard medium of exchange. As shown in the article “Let’s make a deal”, exchanging of pizzas for storage space and exchanging gift certificates for medical services are all about barter (Bertrand, 1995). This trade type is currently gaining popularity in the trade industry since many have come to realize how beneficial it can be. Even though it may appear simple, it is quite complex.
A number of factors exist that favor barter trade compared the other trade type; monetary trade. Below are some of the factors that make individuals prefer bartering of goods and services to using money as a means of payment.
Liquidity problems tend to lower peoples creditworthiness. Therefore, anyone in such a predicament has to use goods or services to make payments since he has no cash in hand to settle his debts. Barter trade is a very effective way for any organization or individual wishing to overcome cash flow problems.
Inflation/Devaluation of currency
When an economy is faced with inflation and prices shooting higher than normal, bartering of goods and services can be a good remedy for this situation. Since money, the usual medium of exchange, loses its value, individuals opt to exchange goods for goods. In the 1990s, barter activities were reported to increase in Russia as it was experiencing a high inflation rate. Confidence in money had diminished completely as their currency suffered devaluation (Wankel, 2009).
Unfavorable tax systems
Wankel continues to say that “organizations tend to barter it the tax system in their country does not favor their operations”. For instance, in Russia, the tax authorities had been granted the go ahead to block accounts of those who had tax arrears. Consequently, the affected could not access their money in banks to carry out transactions and therefore forced to turn to barter trade (p 120).
Absence of foreign currencies
The absence of foreign currencies is another factor which hinders trade between countries, in turn favoring barter. Wankel refers back to the communist power times when trade between European countries was mostly barter due to lack of common currencies (p 120). Such currencies act as common measures of value recognized and acceptable by both parties to transactions.
Surplus production and idle resources
Barter practices have been used in economies with surplus production and idle resources to dispose what they may have in plenty for what they may be lacking. However, the challenge in this undertaking lies in concept referred to as the double coincidence of wants. For it to work, a party must be having what the other one wants.
Technological breakthroughs especially the Web
Advances in terms of technology have also played a major role in popularizing barter trade. The current breakthroughs in web related technologies have made trade activities very easy and fast. Barter activities are no longer that complex since software programs have been developed and which have turned out be major boosts to the trade industry.
As much as the bartering can help organizations and individuals increase sales, overcome liquidity problems, beat inflation and other barriers to trade, the system has its own disadvantages. As noted from Winkel’s book, it requires double coincidence of wants and goods ought to be divisible; challenges not faced in monetary trade (p 119).
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