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December 16, 2018 

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IMPLICIT COST: An opportunity cost that does NOT involve a money payment or a market transaction. This should be contrasted with explicit cost that DOES involve a money payment or a market transaction. The common misconception among non-economists out there in the real world is that the term "cost" is synonymous with the term "payment," that is, all costs are explicit costs, to be a cost you have to give up some money. Well, I'm here to tell you that this isn't true. Cost is opportunity cost. It's the satisfaction NOT received from activities NOT pursued. It's the value of foregone production. And not all opportunity costs involve a money payment.

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BARTER ECONOMY:

An economy that trades goods and services predominately using barter exchanges rather than money. Barter economies predated the invention of money, emerging out the early stage of self-sufficiency before giving way to the use of commodity money. However, barter economies occasionally surface in modern times, especially when the public loses confidence in the monetary unit during a government crises or a period of hyperinflation.
A barter economy is one that relies extensively, if not exclusively, on barter to exchange goods and allocate resources. A pure barter economy is about as unlikely as a pure market economy, a pure command economy, or any other type of "pure" economic notion. However, earlier human societies did rely extensively on barter trades as they progressed from self sufficiency to the full-blown use of money.

The Benefits of Barter

A barter economy is vastly superior to one in which each person is totally self sufficient. Barter replaced self sufficiency in the development of economic civilization for a couple of reasons:
  • Specialization: The first reason is that a barter economy encourages specialization in the production of goods and services. An economy that relies on self-sufficiency means that EACH individual must be able to produce EVERY good consumed. If Duncan Thurly wants knickers, then HE must be able to make knickers. If he wants hamster hats (not hats from hamsters, but hats for hamsters), then HE must be able to make hamster hats. Alternatively, in a barter economy each person can become proficient in the production of a single good. Kevin Kopplemeyer can specialize in knicker production and Duncan Thurly can specialize in hamster hats. With such specialization each can be extremely skilled in the production of the chosen good. Then end result is an increase in the total production of knickers and hamster hats.

  • Variety: The second reason is that barter gives people access to a wider variety of goods than they would with self sufficiency. If Duncan Thurly has to make knickers, hamster hats, candles, and every other good that he consumes, none of which his is proficient at producing, then his selection of goods is limited. If Duncan has NO ability to make knickers, then he does not HAVE knickers. However, with barter and specialization, he can devote his time, energy, and other resources to producing hamster hats, and he can make a lot of hamster hats. He can then trade those hamster hats to someone like Kevin Kopplemeyer who IS extremely proficient and skilled at knicker production. In fact, Duncan is able to trade his hamster hats for all sorts of goods that he could never produce on his own.

But a Couple of Problems

While barter is better than self sufficiency, it is not without a few drawbacks of its own. Barter economies have been largely replaced by money-using economies for a couple of reasons.
  • Lost Production: First, barter requires a double coincidence of wants. To complete a barter exchange, each trader must have what the other trader wants and wants what the other has. Without double coincidence of wants a barter trade is not possible. Duncan might have a lot of hamster hats and is willing to trade for knickers. Unfortunately, it might take Duncan a great deal of time and effort to find another trader who has knickers and is in need of hamster hats. The time Duncan spends looking for a trading partner is time that cannot be spent making hamster hats. An economy that relies extensively on barter trades is bound to devote a lot of resources seeking out trading partners, resources than cannot used for production.

  • No Complexity: Second, barter exchanges work best if production is relatively simple. One person fabricates a few hamster hats, another makes knickers, and a third producers candle sticks. These goods are easily produced and easily traded. Goods that involve more complex production techniques, such as automobiles, aircraft, and housing, are not as easily exchanged through barter. Duncan Thurly can easily barter his hamster hats for a pair of knickers, candle sticks, a loaf of bread, and a wide variety of other wants and needs satisfying goods. However, should Duncan produce a complex product like an automobile, he is likely to find bartering exceedingly difficult. Duncan might spend a year producing his car, with nothing to barter until the product is finished. Then the value of the product is bound to be so great that finding another trader with double coincidence of wants is a challenge. Complex production does not work well with barter.

<= BARTERBEHAVIORAL ALTERNATIVES =>


Recommended Citation:

BARTER ECONOMY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 16, 2018].


Check Out These Related Terms...

     | double coincidence of wants | barter | value in use | value in exchange | commodity money | fiat money | medium of exchange | M1 |


Or For A Little Background...

     | money | specialization | market | satisfaction | exchange | money functions | money characteristics |


And For Further Study...

     | fractional-reserve banking | banking | money creation | monetary policy | Federal Reserve System | money supply | money supply, aggregate demand determinant | monetary economics | Keynesian economics | aggregate market analysis | business cycles |


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     | Internal Revenue Service |


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