July 14, 2024 

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LOCATION THEORY: A theoretical framework for studying the location decisions made of firms and households based on transportation cost and spatial differences in the accessibility of inputs and markets for outputs. Location theory, developed with noted contributions from August Losch, Alfred Weber, Johann von Thunen, Walter Christaller, and Walter Isard, explicitly considers the cost of transportation in the production and consumption choices made by firms and households. Location theory has been used to explain urban density, labor migration, and land use.

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A method of trading goods, commodities, or services, directly for one another without the use of money. Barter was the first type of market exchanged undertaken by human civilization as people advanced beyond self sufficiency in the satisfaction of their wants and needs. Modern economies still use a modest amount of barter to allocate resources. The key to a barter exchange is a double coincidence of wants, in which each side of the exchange wants what the other side has and has want the other side wants. A barter exchange tends to be less efficient that exchanges involving money.
In a barter exchange one good is traded directly for another. This form of exchange requires a double coincidence of wants, meaning that each trader has what the other trader wants and wants what the other has. Without a double coincidence of wants the exchange process can become exceedingly complex, requiring a great deal of resources to complete transactions, resources that cannot be used for production. In fact, inefficient barter trading is the primary reason that money was invented. With money, more resources can be used for production and fewer are needed for trading.

Some Barter Examples

The hypothetical community of Shady Valley offers a couple of examples of barter trades.
  • One representative example involves two dedicate professionals--Dan Dreiling, who installs drywall for a living, and Dr. Nova Cain, who does dental work. The potential for a barter exchange emerges because Dan Dreiling has a gaping hole in his bicuspid and Dr. Nova Cain is remodeling her breakfast nook. Barter results when Dr. Cain fills Dan's bicuspid cavity in exchange for the installation of drywall in Dr. Cain's breakfast nook. Neither makes monetary payment for the production provided by the other. No money trades hands.

  • Another example involves the studious activities of Chip Merthington and Alicia Hyfield, two more or less dedicated students at the Ambling Institute of Technology. The opportunity for barter exists because Alicia is proficient at calculus while Chip has a firm grasp of the intricacies of the biological sciences. A barter exchange transpires when Alicia agrees to assist Chip as he pursues a better understanding of partial derivatives and other calculus concepts in exchange for Chip providing Alicia with insight into lymph nodes and other biological notions. Neither pays the other a money sum for the academic assistance provided.

Double Coincidence of Wants

The key to barter trades is a double coincidence of wants. Each trader must have what the other wants and want what the other has. If this condition is not satisfied, then no barter exchange can occur.

If, for example, Dr. Nova Cain needs plumbing services rather than drywall installation, then no barter with Dan Dreiling takes place. Neither is a barter exchange in the works with Dr. Cain, if Dan is in need of an appendectomy rather than a root canal.

In a like manner, if Chip Merthington has no interest in mastering calculus or if Alicia Hyfield has long since given up on the prospects of learning biology, then a barter trade of academic information is not likely.

From Self Sufficiency to Barter

To highlight the role barter has played in the historical progression of economic activity, consider the progression from self sufficiency to barter.

Envision a journey to the beginning of economic time, a simpler time, a time without markets, a time without money, a time without Microsoft Windows. During these ancient times, human ancestors meandered about, more prone to grunt "food" than debate monetary policy. They were largely occupied with the task of satisfying their wants and needs. These folks were heavily into self sufficiency, foraging for their own food, making their own clothing, molding their own candles, and fabricating their own hamster hats (not hats FROM hamsters, but hats FOR hamsters). Self sufficiency was the rule of the day.

But these ancestral folks eventually realized that life could be better with a little trading. One person could devote their resources to fabricating hamster hats, while others made clothing or candles. Each could then trade what they had for what then did not have. This is a barter system. As economic history progressed, self-sufficiency gave way to barter, because barter was better.

There are two reasons for better-barter:

  • First, unlike self-sufficiency, barter lets resources specialize in production. Some resources can special in hamster hat production, dental services, or calculus. Others can then devote their efforts to candle stick making, drywall installation, or biology. When resources specialize, they are more productive.

  • Second, with barter trades, people can access a wider variety of goods than they could produce on their own. A single person is unlikely to have the time to fabricate hamster hats, make candle sticks, learn how to extract wisdom teeth, do drywall installation, understand calculus, know about biology, and provide all of the other assorted goods and services that generate satisfaction. With this greater variety of production, people are able to satisfy a wider range of wants and needs.
Barter emerged because it made people better off. It improved living standards and well-being. It was a better way of satisfying wants and needs.

But barter is not perfect. A couple of problems are:

  • One: The double coincidence of wants requirement means that barter traders are prone to spend a lot of effort seeking out trading partners, effort that CANNOT be used for production. Dan Dreiling might spend the better part of a week seeking out a dentist in need of his drywall services. The time spent searching for a suitable dentist is time that Dan does not use installing drywall.

  • Two: Barter trades do not allow complex activities that involve several production stages. The mass production of something like an automobile is virtually impossible in an economy that relies exclusively on barter exchanges. Because each worker contributes only a small part of complex product, there is almost nothing that an individual worker has to barter.

No Tax Zone

While barter exchanges were largely replaced by exchanges using first commodity money, then fiat money as human civilization progressed, they have not totally vanished from the economic landscape. Some modern barter trades are a matter of convenience, such as Alicia and Chip assisting each other with their studies.

However, a number of barter exchanges are designed to circumvent official documentation and taxes. If Dan installs a little drywall for Dr. Cain in exchange for a root canal, then both activities can be "off the books." Because no money trades hands (or bank accounts), the activities can transpire without any official records, the types of records that are used to report income and income taxes. While the failure to report barter trades is illegal, it does happen.


Recommended Citation:

BARTER, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 14, 2024].

Check Out These Related Terms...

     | double coincidence of wants | barter economy | 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 |

Related Websites (Will Open in New Window)...

     | Internal Revenue Service |

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