Money as a Medium of Exchange
- A system where goods are exchanged directly is called a barter system . In a barter system, when both parties agree to sell and buy each other’s commodities, it is known as a double coincidence of wants .
- However, money eliminates the need for a double coincidence of wants. We use money as an intermediary in the exchange process , it is also called a medium of exchange.
For example:
If a shoe manufacturer wants to exchange his shoes for wheat , he first has to look for someone who not only wants to sell wheat but also wants to buy shoes in exchange, which is a problem because if a wheat seller refuses to exchange wheat for shoes then this trade won’t happen . That is where the money comes into place.
Here if money is used as a medium of exchange then the shoe manufacturer can sell his shoes to anyone in exchange for money and then buy wheat with that money. Hence, because money is used as an intermediary in this exchange process, it is called the medium of exchange .
