Medium of Exchange

What Is a Medium of Exchange?

A medium of exchange can be seen as an intermediary instrument or system that is used to facilitate a sale, purchase or even trade of goods between parties. 

Throughout modern economies, the medium of exchange is currency, and if money as represented by a currency becomes no longer viable as a medium of exchange, or if the monetary units cannot be accurately valued, the consumers end up losing the ability to plan budgets and there’s no way to gauge demand with accuracy.

Now, using a medium of exchange will allow greater efficiency in an economy, and it will lead to an increase in the overall trading activity.

When we look at a traditional barter system, trade between two parties only occurs when one party has a commodity that another party wants, or the other way around. When it comes to the chance of this happening at the same time as a cross occurrence, where each of the parties desires something that the other one has, it is improbable. 

With a medium of exchange, however, think along the lines of gold. If one party had something that they want to exchange with another party, for example, if you had a laptop, but were in the market for a gaming computer, you could sell your laptop for gold, and then use that gold to purchase a gaming computer. This gold example would be inefficient by today’s standards, but it shows you what a medium of exchange can do to facilitate trades in a marketplace.

Money as a medium of exchange enables anyone who possesses it to participate as an equal market player. When customers end up using money to purchase an item or a service, they are effectively making a bid in response to the asking price, and this interaction creates order and predictability within the marketplace, as producers know what to produce, as well as how much to charge, while the consumers can reliably plan their budgets around the predictable as well as stable pricing models.