Barter

What Is Barter?

Barter is a system of trade in which people swap one good or service for another without using money. A carpenter who repairs a neighbor's roof in return for a share of the neighbor's harvest is engaging in barter. Economists often describe barter as the earliest form of trade, though historians debate how common pure barter was in practice, since many early societies relied on gift exchange, credit, and informal obligations.

How Barter Works

A barter transaction requires a "double coincidence of wants." Each party must have something the other wants, and both must agree on the terms of the swap. A baker who needs shoes must find a shoemaker who needs bread at the same time. This requirement makes barter inefficient when the number of possible trading partners is small or when the goods being exchanged differ greatly in value.

Money solves this problem by serving as a common unit that both buyers and sellers accept. This is one reason economies moved away from barter as they grew more complex. Barter has not disappeared, however. It persists in several forms.

Barter in Modern Markets

Businesses sometimes trade goods or advertising space directly, and some companies use organized barter exchanges that record credits among members. Individuals may also trade services informally. In many of these arrangements, the value of each side is estimated in money terms, even though no cash changes hands.

Advantages and Disadvantages

Barter can allow people with little cash to obtain needed goods. It can also be useful when money is scarce or unstable. However, valuing goods is subjective, and finding a suitable partner can be time-consuming. Barter income may also be taxable in many countries, so participants often need to track the fair value of what they receive.