Friday, February 6, 2009

Credit Starved Nations Turn to Barter

Given the scope of the financial crisis, some nations who are having difficulty acquiring credit are turning to bartering for food and raw materials with other nations. This does not happen often, and typically is less efficient than monetary transactions. Under barter, both the buyer and seller have to agree not only on a price, but also on the goods bought and sold. Under monetary transactions, the buyer and the seller only have to agree on the price, since the means of payment is money, which is easily acceptable. This additional constraint - both sides agreeing on the products being traded will lead to some profitable and welfare enhancing trades not taking place, and this is what reduces overall economic efficiency.

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