A transitional instrument used to settle the trade of products and services among market participants
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What is a Medium of Exchange?
A medium of exchange is a transitional instrument used to settle the trade of products and services among market participants. It is a system used to enable the exchange of items.Currency is the most common medium of exchange accepted as a standard by all parties for settling economic transactions.
In modern economies, currency as a medium of exchange has made economic dynamics possible. The standardization of currency as the medium of exchange has enabled quick trade settlements.
Summary
- A medium of exchange eases the trade of goods and services.
- The most common and generally accepted medium of exchange in the modern economy is money – represented as currency.
- A medium of exchange should have a consistent intrinsic value, be interchangeable, transportable, and reliable.
Characteristics of a Medium of Exchange
The following are the characteristics required of a medium of exchange:
- Common and obtainable
- Low preservation cost
- Recognizable
- Transportable
- Consistent
- Dividable
- Resistance to falsification
- Large market value with respect to weight and volume
- Value common holdings
In an economy, a medium of exchange increases efficiency and acts as a stimulus for increasing trading-related activities. The most essential and important function of a medium of exchange is that it should have real value – i.e., it should possess steady purchasing power. Also, it should be widely accepted.
For any instrument to be widely accepted as a medium of exchange, it should be reliable, interchangeable, and have an intrinsic value.
Purposes of a Medium of Exchange
1. To facilitate exchange
The primary purpose of a medium of exchange is to assist a sale or purchase. The process of exchange is carried through a medium of exchange as participating parties acknowledge the worth of the medium.
2. Stored value
A medium of exchange should continue to have a stored value over time. The stored value can be used in successive exchanges and does not depend on the length of the time the medium was held.
Items other than money can also be used as mediums of exchange. A non-monetary instrument can be considered one if its value either appreciates or stays constant over time. Land and precious metals are some examples of non-monetary mediums of exchange.
3. Common language
The medium of exchange converts worldwide exchanges into common terms to enable smooth trade transactions. Regardless of the location, the dynamics of money is easily understood by the participating parties. When exchange methods other than money are used, the parties may find it difficult to determine the value of the exchanged item.
4. Measurement unit
The medium of exchange can also serve as a unit of account for calculating the medium’s worth when it is presented in uncommon terms. For example, since foreign currencies can be converted from one unit to another, the exchange units can be accounted for accurately.
Currency as a Medium of Exchange
Money, represented by currency, enables participation in the market as an equal player. The purchase of a product or service implies that consumers have made a bid following a price ask. Such an interaction allows the producers to determine the item category and the quantity to be produced.
Consumers can also predict the price models and plan their budgets accordingly. In case money loses its characteristics as a medium of exchange or the items exchanged cannot be valued accurately, it becomes difficult for the consumers to plan their budgets.
Furthermore, market unpredictability will result in a chaotic economy, as it becomes difficult to estimate demand and supply.
Alternative currencies, such as scrip, are available and have surfaced during times of economic pressure to stimulate trade. Local currencies have emerged in the U.S. to promote economic growth in a particular region.
BerkShares is an example of such currency. It was first issued in 2006 as the local currency of the Berkshires region in Massachusetts and is accepted by approximately 400 local businesses. The BerkShares value is pegged to the dollar value and is issued at 95 cents.
Related Readings
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FAQs
A medium of exchange is a portable instrument that is used as an intermediary to facilitate the sale and purchase of goods between parties. In modern economies, the medium of exchange is currency. A currency must remain reasonably stable in value in order for it to work as an intermediary.
What is a good medium of exchange? ›
The most common and generally accepted medium of exchange in the modern economy is money – represented as currency. A medium of exchange should have a consistent intrinsic value, be interchangeable, transportable, and reliable.
What is the medium of exchange Quizlet? ›
Medium of exchange. A medium of exchange is an intermediary instrument used to facilitate the sale, purchase or trade of goods between parties. For an instrument to function as a medium of exchange, it must represent a standard of value accepted by all parties. In modern economies, the medium of exchange is currency.
Why is my accepted as a medium of exchange? ›
And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own. Then, why is it accepted as a medium of exchange? It is accepted as a medium of exchange because the currency is authorised by the government of the country.
What acts as a medium of exchange? ›
Money acts as a medium of exchange as it acts as an intermediate in the exchange process and transactions. Buying and selling of commodities are done with the exchange of money.
What is anything accepted as a medium of exchange? ›
In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency.
What are two examples for medium of exchange used by people? ›
Goods and services can be bought and sold with the use of money. For example, someone who wants shoes can buy it with money and if someone wants to sell shoes, that also can be done by receiving money. ... Money is used as a medium of exchange because it's the intermediary in the exchange process.
How many is a medium of exchange? ›
Money helps to facilitate trade because people in the economy generally recognize it as valuable. Money is called medium of exchange because money is a widely accepted token that can be used for exchange of any good or service. In old days, barter system was used as medium of exchange and later it was gold.
What provides a medium of exchange? ›
Money serves as a medium of exchange for goods and services. For a barter system to work, there has to be a coincidence of desires between the individuals participating in a transaction. A medium of exchange eliminates the need for complex trading systems to exchange various commodities and services in a bartered way.
Which of the following is an example of a medium of exchange? ›
Medium of exchange enables the transaction of goods between two parties. In the given case, money, other goods as well as pigs are used to procure other goods and hence, they all would be considered as a medium of exchange.
Money is anything that serves as a medium of exchange. A medium of exchange is anything that is widely accepted as a means of payment.
What is another term for medium of exchange? ›
legal tender, stamp, tender. something that can be used as an official medium of payment. money. the most common medium of exchange; functions as legal tender.
What's bad about not having a medium of exchange? ›
What's bad about not having a medium of exchange? Nobody knows what anything is worth. Prices rise. To trade, you must find someone who wants exactly what you have, and has exactly what you want.
What is the role of money as a medium of exchange? ›
Money acts as medium of exchange as it facilitates exchange through a common medium i.e. currency. With money as a medium, the two components of a transaction namely, sale and purchase can be easily separated.
Is medium of exchange a means of payment? ›
In other words, medium of exchange is a concept of "what is to be paid", while means of payment is a notion of "how to deliver it." Hence, "medium of exchange" and "means of payment" are NOT synonymous. Therefore, we should not refer to money as a means of payment, or "anything that is generally accepted as payment."
What became the medium of exchange? ›
Money helps to facilitate trade because people in the economy generally recognize it as valuable. Money is called medium of exchange because money is a widely accepted token that can be used for exchange of any good or service. In old days, barter system was used as medium of exchange and later it was gold.
What is exchange of information through a medium? ›
Communication is a process that involves the exchange of information between two or more interlocutors. Is a process of sharing information through a medium/channel. The process of imparting or interchange of thoughts, opinions, or information by speech, writing, or signs.
How does money act as a medium of exchange answer? ›
Money facilitates transactions of goods and services as a medium of exchange. Producers sell their goods to wholesalers in exchange of money. Wholesalers, in turn, sell their goods to the retailers and the retailers sell these goods to the consumers in exchange for money.
