8/31/2020

Barter System
Group: The Explorers

Group Leader: Hamadullah Abro

BBA-19-010 Abdul Sattar Langah
BBA-19-037 Fahaz Ahmed Memon
BBA-19-041 Hamadullah Abro
BBA-19-059 Mohsin Ali Chachar
BBA-19-070 Muzammil Mujtaba
BBA-18-043 Habibullah Jummani

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 Table of Contents
Barter system ....................................................................................................................................3
Benefits of Barter...............................................................................................................................3
How Individuals Barter .......................................................................................................................3
How Countries Barter .........................................................................................................................4
Modern Barter Exchanges ..................................................................................................................4
Tax Implications of Bartering ..............................................................................................................4
How to Barter............................................................................................................................................ 4
Limits of Bartering .............................................................................................................................5
Currency System ................................................................................................................................6
Barter System vs. Currency System: An Overview ...............................................................................7
The major drawbacks of the barter system were: .................................................................................... 7

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Barter system
Before evolution of money, goods were exchanged for goods, this system of exchange was known
as barter system.

Barter is an act of trading goods or services between two or more parties without the use of money
(or a monetary medium, such as a credit card). In essence, bartering involves the provision of one
good or service by one party in return for another good or service from another party.
 Bartering is the exchange of goods and services between two or more parties without the
use of money.
 It is the oldest form of commerce.
 Individuals and companies barter goods and services between each other based on
equivalent estimates of prices and goods.
 The IRS considers bartering to be a form of income that incurs taxes.
A simple example of a barter arrangement is a carpenter who builds a fence for a farmer. Instead
of the farmer paying the builder $1,000 in cash for labor and materials, the farmer could instead
recompense the carpenter with $1,000 worth of crops or foodstuffs. Value of their goods and
services and offer them to one another in an even exchange. It is the oldest form of commerce,
dating back to at time before hard currency even existed.

Benefits of Barter
Bartering allows individuals to trade items that they own but are not using for items that they
need, while keeping their cash on hand for expenses that cannot be paid through bartering, such
as a mortgage, medical bills, and utilities. Bartering can also have a psychological benefit because
it can create a deeper personal relationship between trading partners than a typical monetized
transaction. Bartering can also help people build professional networks and market their
businesses.

On a broader level, bartering can result in the optimal allocation of resources by exchanging goods
in quantities that represent similar values. Bartering can also help economies achieve equilibrium,
which occurs when demand equals supply.

How Individuals Barter

When two people each have items the other wants, both people can determine the values of the
items and provide the amount that results in an optimal allocation of resources. Therefore, if an
individual has 20 pounds of rice that he values at $10, he can exchange it with another individual
who needs rice and who has something that the individual wants that's valued at $10. A person
can also exchange an item for something that the individual does not need because there is a
ready market to dispose of that item.

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How Countries Barter
Countries also engage in bartering when they are deeply in debt and are unable to obtain
financing. Goods are exported in exchange for goods that the country needs. In this way, countries
manage trade deficits and reduce the amount of debt they incurred.

Modern Barter Exchanges

While it is mostly associated with commerce during ancient times, bartering has been reinvented
in this era through the Internet. Online barter exchanges became especially popular with small
businesses after the 2008 financial crisis, which culminated in the Great recession.

As prospects and sales dwindled, small businesses increasingly turned to barter exchanges to
generate revenue. According to the New York Times, barter exchanges reported double-digit
increases in membership in 2008. The exchanges enabled members to find new customers for
their products and get access to goods and services using unused inventory. The exchanges also
used custom currency, which could be hoarded and used to purchase services like hotel stays
during vacations. The barter economy during the financial crisis was estimated to have touched
$3 billion.

Tax Implications of Bartering

The Internal Revenue Service (IRS) considers bartering a form of revenue and something that must
be reported as taxable income. Under the U.S.'s generally accepted accounting principles (GAAP),
businesses are expected to estimate the fair market value of their bartered goods or services. This
is done by referring to past cash transactions of similar goods or services and using that historical
revenue as a reportable value. When it is not possible to accurately calculate the value, most
bartered goods are reported based on their carrying value.

For the IRS, estimated barter dollars are identical to real dollars for tax purposes, which means
that barter arrangements are considered the same as cash payments. The barter dollars are
reported as income and taxed in the fiscal year in which the barter occurred.
How to Barter
So how can an individual successfully barter? Here are some tips:

Identify your resources: What items do you have that you could easily part with? Use a critical eye
to go through your home, and consider possessions you may have in storage or that another family
member or friend is currently using. If you would prefer to offer services, honestly assess what
you could provide for others that they would otherwise pay a professional to do. It could be a skill
or a talent, or even a hobby, such as photography.

Put a price tag on it: Successful bartering must result in the satisfaction of both parties. This can
only happen if the items bartered are realistically valued. If you have an item you would like to
trade, obtain an accurate appraisal. An item is only worth what someone is willing to pay for it.

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Therefore, do your research and look at the "selling" section on eBay to find out what online buyers
have paid for similar items.
To value a service, call around for local estimates from professionals to find out how competitively
you can price your abilities. Remember to be honest about your skills and to factor in costs
associated with the exchange; for example, shipping (for goods) or materials (for trading a skill).

Identify your needs: Be specific about what you are looking for in a barter exchange. In addition to
specific items you may need, here is a list of potential services that you could barter for:
 Babysitting/daycare
 Car repair work
 Lawn care/landscaping
 Computer repair
 Small home improvement projects
 Plumbing
 Moving assistance
 Tax preparation
 Medical care
 Lodging

Search for bartering partners: After you know what you have to offer and exactly what you
need/want in a barter situation, find a barter partner. If you don't have a specific person or
business in mind, try word of mouth. Let your friends, colleagues, and social network know about
your specific need and what you want in a barter situation. Use Facebook, LinkedIn, and Twitter.
Check online swap markets and online auctions that have a bartering component, such as
Craigslist.com (check under "For Sale" for the Bartering category), Swapace.com, SwapThing.com,
Barterquest.com, U-Exchange.com, Trashbank.com, and Ourswaps.com.
Check for local bartering clubs. Your local Chamber of Commerce may be able to provide you with
information on similar clubs in your area.

Make the deal: After you've found a barter partner, get the agreement in writing. Make sure you
detail what services or goods will be involved, the date of the exchange (or work to be done), and
any recourse if either party reneges on their part of the deal. If you are working through a
membership-based bartering association, they will likely provide all the structure and paperwork
you need for the deal.

Limits of Bartering
Bartering does have its limitations. Much bigger (i.e., chain) businesses will not entertain the idea
and even smaller organizations may limit the dollar amount of goods or services for which they
will barter (i.e., they may not agree to a 100% barter arrangement and instead require that you
make at least partial payment). But in an economic crunch, bartering can be a great way to get the
goods and services you need without having to pull money out of your pocket.

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Some businesses that may not directly barter with customers might swap goods or services
through membership-based trading exchanges such as ITEX or International Monetary Systems
(IMS). By joining a trading network (which often charge fees), members can trade with other
members for barter "dollars." Each transaction is subject to a minimal fee; the exchange facilitates
the swap and manages the tax components of bartering, such as issuing 1099-B forms to
participating members. You may find a nearby exchange through the International Reciprocal
Trade Association (IRTA) Membership Directory. Before you sign up and pay for a membership.

Since the beginning of known history, humans have directly exchanged goods and services with
one another in a trading system called bartering. The history of bartering dates all the way back to
6000 BC. Introduced by Mesopotamia tribes, bartering was adopted by the Phoenicians. The
Phoenicians bartered goods to those located in various other cities across oceans. Traditionally,
bartering systems were used within the local community, but advances in technology and
transportation make it possible for modern society to barter on a global level.

Appliance repairman as payment for repairing her oven. Bartering makes it easier to negotiate but
lacks the flexibility of a currency system .M any small business accept non-monetary payments for
their services and the IRS treats these bartered transactions the same as currency transactions for
tax-reporting purposes.

 Bartering systems were used within the local community, but advances in technology and
transportation make it possible for modern society to barter on a global level.
 Bartering has its limitations, which led to the creation of currency systems.
 In early civilizations, common agreed-upon goods, such as animal skins or salt, served as a
currency that individuals could exchange for goods and services.

Currency System
Bartering has its limitations. The local blacksmith needs two loaves of bread, but if the baker needs
plumbing services instead of new shoes for her horse, the blacksmith must find a plumber who
needs new tools to make the trade. Currency systems were developed to eliminate this hassle. In
early civilizations, common agreed-upon goods, such as animal skins or salt, served as a currency
that individuals could exchange for goods and services.

As currency systems progressed over time, coins and paper notes evolved to support their
economies and to encourage trade within the region. Coinage usually had several tiers of coins of
different values, made of copper, silver, and gold. Gold coins were the most valuable and were
used for large purchases, payment of the military, and backing of state activities. Units of account
were often defined as the value of a particular type of gold coin. Silver coins were used for
intermediate-sized transactions, and sometimes also defined a unit of account, while coins of
copper or silver, or some mixture of them, might be used for everyday transactions.

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Most countries now use a monetary currency system, but individuals can still barter or adopt
another agreed-upon currency system. These alternatives may be used in addition to or as a
replacement for the national monetary system in place.

Barter System vs. Currency System: An Overview

The primary difference between barter and currency systems is that a currency system uses an
agreed-upon form of paper or coin money as an exchange system rather than directly trading
goods and services through bartering. Both systems have advantages and disadvantages, although
currency systems are more widely used in modern economies.
The major drawbacks of the barter system were:
(I) Lack of double coincidence of wants: It was a major drawback of the barter system. It was very
rare when the owner of some goods or services could and someone who wanted his goods or
services and possessed that goods or services that the first person wanted. No exchange was
possible, if the double coincidence of wants was not there.
(II) Lack of common measure of value: In barter system, there was absence of a common unit of
measurement in which the value of goods and services can be measured. In the absence of
common unit, proper valuation was not possible.
(III) Lack of standard for deferred payments deferred payment means future payments. In barter
system, it was difficult to return value in future in terms of goods of same quantity and quality.
Therefore, future, payments regarding interest and loans became difficult.
(IV) Lack of store of value Due to absence of money in barter system, wealth was stored in terms
of goods. Storing of goods carried some problems like cost of storage, loss of value, transfer from
one place to other, etc. So, in case of commodities, it was difficult for people to store their
purchasing power.
(v) Lack of divisibility: In commodity exchange, difficulty of dividing the commodity has been
raised. E.g. if car is to be exchanged for a scooter, then car cannot be divided. Similarly, animals
cannot be divided into smaller units.

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