MONEY AS A MEDIUM

  • As we look around, we see that all our transactions take place in the form of money. Whenever we buy or sell a commodity, we exchange that with money. Sometimes it is paid on the spot and sometimes it is promised to be repaid later.
  • A person holding money can easily exchange it for any commodity or service that he or she might want. Thus everyone prefers to receive payments in money and then exchange the money for things that they want.

 MEDIUM OF EXCHANGE

  • Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat. Imagine how much more difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without the use of money.

  • He would have to look for a wheat-growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange. That is, both parties have to agree to sell and buy each other’s commodities.
  • This is a double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
  • Whereas, in an economy where money is used, the problem of double coincidence is eliminated.
  • Since money acts as an intermediate in the exchange process, it is called a medium of exchange.