Entering the trading world seems very overwhelming. There are so many things you have never heard of and so many terms which feel like they mean the same. One such confusion is- Barter vs. Exchange. If you are new to trading and are figuring out what these terms mean and what is the difference between them, this post is for you. This article is sure to answer a lot of questions, so keep reading.
What Is The Barter System?
The barter economy is enormous. With the disclaimer that the sum may differ greatly, based on the magnitude of countertrade activity that takes place each year, IRTA (International Reciprocal Trade Association) pegs the total yearly volume of barter transactions at between $12 and $14 billion. Since the majority of barter transactions are privately held and do not disclose many details, it is impossible to calculate the entire volume of transactions with absolute accuracy. The truth remains that $12 billion of products and services are exchanged year without any money being exchanged.
A barter system is a medium of transaction that doesn’t require any currency or money. Most of us use barter every day without realizing that we are actually trading one thing for another without money. For example, kids do this a lot. If you ask them to do something, they’ll ask for something in return, maybe they’ll ask you to prepare their favorite pasta. So barter is not only limited to trading tangible goods but also services. You can exchange two services or one service with a tangible product.
Barter was actually a mode of obtaining goods in ancient economies. People would exchange a sack of grains for obtaining clothes worth the same amount. There were two big issues with this system. One, finding the party who is interested in the commodity you are about to sell, and second, no specific system to determine the true value of the product. The modern barter system resolved these issues beautifully. We will take this up in detail in the next section. So, because of rising issues, currencies were introduced to make transactions more convenient, and the currency system is what we use to date. However, bartering is still a mode of exchange used by many businesses and individuals.
So to define, barter transactions are the ones that don’t require fiat money to complete the transaction. Instead, two goods and services that are equal in worth are exchanged. It lets you purchase goods without money. Generally, bartering involves the two parties in the transaction, but with barter exchanges coming into action, we also have a third party governing the transaction.
What Are Barter Exchanges?
There are two types of barter systems-
One-to-one bartering or direct barter
Direct exchange happens in a local network where trade partners meet up and discuss how the barter transaction will happen on their own. This system has a lot of similarities to the old barter system since barter exchange happens without third-party interference. Usually, companies who depend on each other’s products or services maintain good relations with each other to successfully conduct barter exchanges. Trust is the most important factor here.
Exchange system
A barter exchange operates as a governing body that decides the worth of the item used on the barter exchange and also makes sure that the scope of the barter is not limited to the local network. Exchanges make local and international trade possible. A barter exchange plays a really important role in modern barter transactions.
Modern Barter System
During the pandemic, many offline businesses managed to earn some money and sustain the crisis using the barter system. For example, you happen to have an excess inventory of decor items, and now your store is shut, and we have a pandemic, so people are more concerned about basic necessities and not decor items.
Now there are two things you can do, either start an online shop to sell it off or get started with barter trade. Creating an online store, marketing it, and managing delivery and customer service would incur a lot of investment of time and money. With online barter exchanges dealing with your excess inventory would be easy. Maybe some interior decorator or even a management firm would be interested in your decor items and would like to buy them.
As you are now aware, barter systems involve no money. Recent barter exchange systems use something called trade credits instead of money. So if someone buys your decor items, you will receive some trade credits. And if you buy something, trade credits will be debited from your account.
Barter exchanges will cost you some transaction fees, membership fees, and account maintenance fees. But in return, you get exposure to different types of business, monthly statements, and all your barter transactions are recorded accurately. Moreover, now you have an unbiased third party deciding the cost of the item being exchanged.
Advantages Of Bartering
- Bartering enables firms with low cash flow to obtain the necessary goods and services at relatively low costs. Therefore it helps in conserving cash.
- If you participate in a barter exchange, you can reach a wider audience and grow your clientele.
- Businesses can overcome obstacles brought on by a downturn in the economy by bartering.
- Members of the Barter network can spend their cash reserves more effectively by substituting trade credits for cash payments on purchases.
What Do We Mean By Exchange?
Please don’t confuse barter exchange with an exchange. Exchange is an umbrella term that encompasses barter and currency systems. The currency system uses fiat currency or coin money to exchange a commodity or service. This is how most of us buy goods today. But when we talk about an exchange, it could also refer to the exchange of different currencies. For example, exchanging US dollars with Pounds. In essence, exchanges involve the exchange of many currencies, a variety of items, or a specific good in return for cash. Usually, people refer to transactions, including money, as exchanges, but not many people know that barter also comes under the umbrella of exchange.
Since we are now discussing the currency system, let’s understand the advantages of currencies over barter.
- There are a lot of conveniences. If you need something, just pay its worth, and you are done. You can exchange money for literally everything.
- Each item is worth a certain amount of money hence there is no issue of one party benefiting more than the other party.
- Money is easy to transfer. Barter dollars can be used only by the members of the barter exchange and only inside that exchange.
- If you exchange goods for goods, you need to understand that money is never dying, but the goods you exchange might. After a few years, they may not be of any use, and you will have to throw them away. But money? You can use it as long as you have it.
- Money plays an important role in helping the economy grow faster.
So, what is the difference?
The primary difference between barter and exchange is that exchange allows the use of money while barter doesn’t. Barter refers to an equal exchange of goods and services only, while exchanges can include both goods/ services and money. Barter is also a form of exchange.
Which system is better?
Both systems help you in acquiring the products by exchanging something that belongs to you, it could be money or your goods. So which system should you use? We have already discussed the advantages of each system so let’s understand the disadvantages to come to a conclusion.
Disadvantages of barter:
- Finding two parties whose wants match. If you are exchanging your decor items, you’ll have to find someone who wants to buy decor items and is also selling the item you need.
- Sometimes one party benefits more than others. Since there is no way to measure the worth of the goods and services exchanged it is obvious that one of the trade partners is benefiting more than the other.
- Storing the item acquired is difficult. Money can be stored easily. You keep it in a locker or deposit it in your bank account.
- Deferred payments cannot be made in the right way. In terms of agreements with deferred payments, the barter system does not offer an acceptable unit. If you make a contract to pay $400 later, it can be done very easily. But how do you define the terms of delayed payment when you are exchanging goods? Therefore, on this basis as well, the barter system suffers a significant disadvantage.
Disadvantages of currency system:
- If we consider cash or paper money, different countries have different currencies, and you cannot use a currency issued in one country to buy something in another. Something like gold can be exchanged anywhere in the world.
- Storing cash can be too difficult. When you exchange something to obtain an item that you need, you will end up putting it to the right use. You don’t have to store it.
- Businesses with limited cash flow will find it difficult to acquire things for their business.
- You have to sacrifice a part of your working capital to acquire certain goods and services.
So which system is the best?
After analyzing the advantages and disadvantages of both systems, it seems like businesses need to make use of both of these systems in the right way. Both of them have great benefits, which you will certainly need for your business.
The disadvantages are already rectified with modern barter exchanges and digital currencies. For example, the problem of one party benefiting more than the other is immediately resolved by involving a third party, i.e., the barter exchange in this transaction. Similarly, the issues with paper money can be resolved using digital mediums to conduct transactions. Transfer fees on digital money are far less than fiat currencies, so you actually end up saving money if you go digital.
You have to analyze your needs to come to a conclusion. For example, if you have excess inventory that can be used for barter, then you can consider bartering it on organized barter exchanges. Similarly, if you are in need of something but you don’t have anything of equal value to exchange, or you don’t have enough barter dollars, you can rely on money.
As of now, both systems co-exist, but the awareness of the barter system is rather low. Not a lot of people know that they can save their working capital by joining a barter exchange. There are also many myths around the barter trade, which are hopefully clarified as you read this post.
Having multiple sources of income is never a bad idea. You might have some things that are of no use to you now, but some other business or individual might need them. Bartering it to them to earn trade credits is a win-win situation. You are able to get rid of something that you don’t need, and at the same time, you managed to earn some trade credits, which can be used to buy something you might actually need for your business. Similarly, when you buy an item, your working capital remains safe, only your trade credits are debited.
Recap:
> Yearly volume of barter transactions is estimated to be around $12-14 billion.
> A barter system is a medium of transaction that doesn’t require any currency or money.
> Barter was actually a mode of obtaining goods in ancient economies. People would exchange a sack of grains for obtaining clothes worth the same amount.
> There are two types of barter systems- direct and barter exchanges
> Direct exchange happens in a local network where trade partners meet up and discuss how the barter transaction will happen on their own.
> A barter exchange operates as a governing body that decides the worth of the item used on the barter exchange and also makes sure that the scope of the barter is not limited to the local network.
> Please don’t confuse barter exchange with an exchange. Exchange is an umbrella term that encompasses barter and currency systems.
> The primary difference between barter and exchange is that exchange allows the use of money while barter doesn’t.
> Both systems are equally good and bad. You have to identify the system to fulfill your current need and then make a choice