Barter agreement

From CEOpedia | Management online

A barter transaction is a trade agreement based on which one commodity is exchanged for a second or several goods for several other goods. Each of the parties in such a transaction is considered to be a person who sells the good and the person who buys the goods he receives from the other side of the transaction. Barter transactions may consist of one purchase contract or two contracts for the sale of goods from each side. The same value of delivery on both sides is necessary for barter transactions, which enables non-cash trading (without transfer of money). Barter is considered the most original form of trade.

Disadvantages of barter

Barter transactions quickly became impractical, as it was necessary to deal with various problems in them. These include the need for a double convergence of interests, which hindered the fact that different products were otherwise desirable by society. There was also a problem regarding setting the exchange rate and their multitude, which resulted from the multitude of products available on the market. Assuming that there are two goods in the economy, there is one exchange rate. With eight, the number of courses is already 28. It is a dependence which is given, e.g. Frederic Mishkin, an American economist who expresses the following formula:

N = (n2 - n) / 2

Assuming that the economy produces n = 200 goods, N = 19,900 exchange rates are possible. Due to organizational problems, barter in the classic form could only be used at a very low stage of human development. Thus, this type of transaction, which worked relatively well only in a small community, was replaced by commodity money, whose role was played by various goods, such as salt and pepper.

Barter today

Although it is no longer used today, it is worth paying attention to the modified, contemporary form of the barter transaction.

It is used, for example, in compensation transactions, with the proviso that delays in delivery or quality differences can be compensated by conventional money. For modern forms of barter we can also include the so-called clearing. It consists in the fact that the parties to the agreement offset each other's debts and liabilities, and once in a while the cash surplus is repaid in cash. The main difference between the two cases described and the classic bartender is the fact that in the modern economy all goods being the subject of a clearing transaction have their value expressed in money, thanks to which the problem of multiplication of exchange rates does not occur. They are therefore very distant solutions from the original form of barter.

Barter transactions, if they are already concluded, are by trade companies. Trading companies are always able to find goods for barter exchange that they can offer to another trading company. Goods that are the subject of barter exchanges are usually difficult to sell, they are goods of lower quality, very often market surpluses. The development of the concept of barter transactions allows the possibility of non-cash exchange of goods for the service provided.

Despite the fact that in the course of barter trading there is an exchange of goods for goods, usually transactions refer to completely different goods. As a result, it is necessary to determine the unit prices of goods that are the subject of both transactions. The value of deliveries must also take into account the transport costs of both parties. Determining these costs is very difficult. If the goods are small, they can be delivered at one time and place, but usually it is not. There is a discrepancy, one party delivers the goods in batches and the other one delivers goods on a one-off basis, so it is necessary to accept assurances regarding the performance of the obligation e.g. by a bank guarantee.

Barter trading is also limited by the state. Barter contracts, despite being used in economic life, have not yet been subject to separate legal regulations. A barter contract contains all the elements of a commercial contract, therefore the components of such a contract are used for its preparation.

In spite of everything, barter always existed, but it had less and less importance. Interestingly, even in modern times it appears when special circumstances such as, for example, war, natural disasters, prevent normal monetary exchange, or when money or loses confidence. Barter also existed in camps, prisons and in Poland, among others during the occupation. Multilateral bartenders have become an alternative to them.

Multilateral barter involves the exchange of goods and services between a group of counterparties connected through multilateral barter platforms. This exchange does not have to take place in one transaction, the exchange items do not have to be equivalent as well. The items of turnover are registered with each subsequent purchase or sale transaction using barter exchange units, and each participant takes care of balancing the purchase and sale balance.

Examples of Barter agreement

  • A farmer exchanging a cow for six chickens
  • A fisherman exchanging a month's worth of fish for a boat
  • A small business exchanging a website design for accounting services
  • A technology company exchanging software development services for advertising space
  • A restaurant exchanging a month's worth of food for a new refrigerator

Other approaches related to Barter agreement

Barter agreements may take other forms, such as:

  • Barter exchanges: Barter exchanges are organized networks of individuals and businesses who come together to trade goods and services. These exchanges typically involve a third-party mediator who will facilitate the exchange of goods and services, and may also provide services such as credit clearing, cash payments, and other services.
  • Direct barter: This is a direct exchange between two individuals or businesses, without a third-party mediator. This type of barter can be very beneficial as it allows for more flexibility and better terms for both parties.
  • Time banking: This is an alternative currency system in which people can trade their own time instead of money. Each hour of time banked is equal to one hour of service or goods provided. Time banking is a great way to encourage people to help each other in their local communities.
  • Online barter: This is an online platform for bartering goods and services between individuals and businesses. Online bartering is convenient and allows for a greater variety of goods and services to be exchanged.

In conclusion, barter agreements can take many forms and offer many benefits. Barter exchanges, direct barter, time banking, and online barter are all different methods of bartering that can be used to facilitate the exchange of goods and services.

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