Currency and money are means of exchange. They are necessary for an economy that allows efficient trading and boosts activities related to trade and exchange. It is significant that they have purchasing power, stored value and common terminology and act as a standard unit of measurement. Money is a particular type of asset in an economy that people use to purchase goods and services from other people or companies.
A medium of exchange is something that buyers exchange with a seller when they want to buy goods or services from the seller. While many things could be used as a medium of exchange in an economy, money is the most common and useful medium of exchange in our society. Objects other than money can also be used as a medium of exchange. A non-monetary instrument can be considered as such if its value appreciates or remains constant over time.
Land and precious metals are some examples of non-monetary means of exchange. In this lesson, we will focus on the particular role that money plays as a medium of exchange in the market. The exchange process takes place through a medium of exchange, since the participating parties recognize the value of the medium. The medium of exchange converts global exchanges into common terms to allow for smooth commercial transactions.
Since all people in the economy generally recognize money as something valuable, it works as a medium of exchange for almost all purchases. A medium of exchange is an intermediary instrument or system used to facilitate the sale, purchase, or trade of goods between parties. The currency is the most common medium of exchange accepted as a standard by all parties to settle economic transactions. A medium of exchange is a function of money that streamlines trade between a buyer and a seller because it is widely accepted as payment for a good or service.
The most essential and important function of a medium of exchange is that it must have real value; that is, a medium of exchange is an instrument of transition used to settle trade in products and services between market participants. Let's look at some examples to illustrate the concept and function of money as a medium of exchange. The stored value can be used in successive exchanges and does not depend on how long the medium has been held. The medium of exchange can also serve as a unit of account to calculate the value of the medium when presented in unusual terms.
In the event that money loses its characteristics as a medium of exchange or the items exchanged cannot be accurately valued, consumers find it difficult to plan their budgets. Fortunately, with a medium of exchange, such as gold, if one of the people had a cow and happened to be looking for a lawnmower, the owner of the cow could sell his animal for gold coins that, in turn, they could use to buy the lawnmower.