What Is Medium Of Exchange?

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Currency and money are mediums of exchange. They are necessary for an economy for efficient trading and boosting the activities related to trade and exchange. Significantly, they have purchasing power, stored value, and common terminology and act as a standard unit measurement. It acts as a stabilizing factor in an economy.

Medium Of Exchange Explained

The medium of exchange in economics is a transitional or financial instrument that helps sell or buy, i.e., exchange goods and services. The entities involved in trading know its worth. The stored value of this median remains constant across the length of time. Most significantly, it translates into a common language of trade globally, without which global trade may never happen or flourish. It is also called a circulating medium.

Key Takeaways

  • Medium of Exchange definition describes the ability of a transitional financial instrument to enable the power of purchasing or selling to its holder. It is known as a circulating medium. It facilitates trade & exchange and stabilizes the economy.Money is a general term for circulating medium. It can have a variety of physical forms as per the prevalent market and nation. Examples include currency or gold, which people widely accept and understand. Currency is the physical form of money that is a reliable, valuable circulating medium. It possesses the power to give value to goods and services.

Another aspect of a circulating medium is its ability to act as a unit of measuring the worth of the goods or services that traders trade or exchange. The capability of circulating mediums as a measuring unit aids in converting one currency to another without difficulty. Moreover, it enables money and currency to function as a standard parameter for trade and exchange of goods.

The circulating medium uses the general lexicon of money to facilitate trade and commerce. The widely accepted currency prevalent in the place of trading represents money. Currency is the face of money, without which exchange of goods and services is impossible. In short, the common term for the circulating medium is money physically represented by a currency.

Both currency and money have the inherent property of facilitating the exchange & trade of goods & services as per their valuation in the market. Circulating medium has helped in a market of trade that uses currencies. Even securities get their monetary value due to the value assigned to them by the currency and indirectly by circulating mediums. So, the function of circulating currency is to act as a standard value to exchange multiple goods or services. It may include any economic tools, objects, or financial instruments.

Example

Here is a medium of exchange example to understand the concept better. 

First, let’s assume a cocoa grower in Africa has to sell her product to buyers. But cocoa is quite rare and precious, so she searches for a buyer in her local area to exchange with other equally valuable goods like rice. However, the producer will face a loss if she does not find a buyer to sell her cocoa. 

Hence, she goes to the market to search for a buyer. An American willing to buy the cocoa in return for his tea surprises her. But the cocoa grower has never traded cocoa for tea, so she is now in a fix. Here, the traditional barter system will not work out as the cocoa buyer does not want to exchange her product for tea. In this situation, the circulating medium comes handy. 

The American buyer and African seller might agree to buy each other’s products using common and widely accepted commodities or financial instruments that will be reliable and have buying power worldwide. As a result, they settle down for gold coins as a circulating medium to exchange for their cocoa-tea trade, making it beneficial to both. Hence, one can observe from this example that the trade of goods was impossible without a common circulating medium. 

Currency As A Medium Of Exchange

Currency is a legal tender that the government issues of a place bearing the assurance of paying the value as printed on the note. It is a standardized financial instrument that the government issues to facilitate trade and exchange within a country. Traders and exchangers use it for international trade, albeit currency exchanges. They use the physical form of the circulating medium to trade & exchange and to understand a country’s economy.

It has the same property as contained in the circulating medium. For example, it enables trade or exchange between the seller and buyer of goods or services in exchange for their assigned monetary values. Without currency, no trade is possible anywhere globally. Currency determines a person’s or institution’s wealth; more currency means a higher monetary value for the person or the institution. Likewise, suppose a country’s currency can buy the maximum goods and services using the lowest denomination like the dollar. In that case, the value of a currency is highly valuable. And if large numbers of currency cannot buy small things, then the value of a currency is quite low and weak. 

Currently, the most powerful circulating medium is the currency of the United States, i.e., the dollar. The dollar is a standard of valuation of all other currencies of the world as it is the most stable and powerful currency in the world.

Money As A Medium Of Exchange

A circulating medium is any tool or instrument used to determine goods and services’ value during their exchange between people. Hence the function of money contains the same property as the circulating medium. Consequently, anyone can possess it to participate equally in the market. As a result, traders and exchangers use money widely worldwide to buy, sell or barter goods or services. 

Money allows its possessor to trade goods and services instead of the bid they place to buy these goods and services. It helps in building up a successful market. People cannot plan their budgets or produce goods or services without money. In such a case, it will disrupt the demand and supply. Moreover, the whole economy based on demand and supply would never exist in the first place. Hence, the primary function of the medium of exchange of money is to play an active and important role in the economy of the whole world. It is the pillar of all the economic theories currently in vogue.

This has been guide to Medium of Exchange and its definition. Here we discuss currency and money as Medium of Exchange with an example. You can learn more from the following articles – 

Any financial instrument like money that buyers and sellers can use for selling, purchasing, or exchanging goods between them is called the medium of exchange. Likewise, money also acts as a circulating medium by assigning a specific value to every good, which can be bought or sold later based on their assigned monetary value. 

Since currency is a financial instrument that the government authorizes to exchange goods and services by assigning a specific value to them, the traders and exchangers accept it as the circulating medium.

Traders and exchangers use money as a medium of exchange because it is the most accepted form of token worldwide that has the power to exchange and trade goods and services.

Money is a medium of exchange for selling and buying goods and services. Therefore, any trade and exchange of goods are impossible without money acting as an intermediary.

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