Edusaint

Money as A Medium of Exchange

Money as A Medium of Exchange

  • Money acts as an intermediate in the exchange process and therefore it is called a medium of exchange.
  • According to Robertson :- “Any commodity that full fills the responsibility of payment and occupation is called money”.

The reason for using money rather than other commodities as mode of exchange are

  • 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.
  • A transaction without money can happen only when there is double coincidence of wants.
  • It means what a person desires to sell is exactly what the other wishes to buy
  • in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
  • It is no longer necessary for the shoe manufacturer to look for a farmer who will buy his shoes and at the same time sell him wheat.
  • Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

Transaction before the Modern form of money

  • Before the introduction of coins, a variety of objects was used as money.
  • For example, since the very early ages, Indians used grains and cattle as money.
  • Thereafter came the use of metallic coins — gold, silver, copper coins — a phase which continued well into the last century

Use of Money

  • The use of money spans a very large part of our everyday life.
  • Several transactions involving money are made in any single day.
  • Goods are being bought and sold with the use of money.
  • Services are being exchanged with money.
  • Goods are also bought with a promise to pay money later.
  • Money is sometimes paid as advance with the promise of delivery of goods later.
  • As the need for a medium of exchange became a necessity different materials were used as a medium of exchange.

Problem of double coincidence of wants

  • In the olden days, when modern currency was not in vogue, people had to sell and buy each others commodities.
  • This was called the barter system.
  • For instance if a shoe manufacturer wants to buy wheat, he has to find a farmer who wants to buy his shoes in exchange for the wheat.
  • Both parties have to agree to sell and buy each others commodities.
  • This is known as double coincidence of wants.
  • In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
  • Barter system A barter system is an old method of exchange.
  • The system has been used for centuries and long before money was invented.
  • People exchanged services and goods for other services and goods in return

Modern form of Money

  • RBI issues notes on behalf of the central government.
  • The law legalizes the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
  • People deposit money with the banks which they don’t need at a point of time by opening a bank account in their name.
  • Banks accept the deposits and also pay an amount of interest on the deposit

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