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Medium of Exchange in Economics: Definition & Examples

Medium of Exchange in Economics: Definition & Examples
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  • 0:00 What Is a Medium of Exchange?
  • 1:03 3 Functions of Money…
  • 2:31 Examples of Medium of Exchange
  • 3:45 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we will explain the term, medium of exchange. We will look at how money is the typical form of medium of exchange and how it functions. We will close with a summary and a quiz.

What Is a Medium of Exchange?

Take a minute and ask yourself, when was the last time you paid for an item or service using something other than money? Chances are, you can't think of a time when money wasn't your first choice while shopping in a store. Whether it be cash, credit card or check, money is usually the main form of payment one uses when making a purchase. Well, that form of payment is what we call a medium of exchange.

In order to fully understand this term, we need to start with the basics. For starters, let's clarify the definition of money. Money is a form of payment used and accepted to pay for goods and services. When money is used to facilitate a sale, it becomes a medium of exchange. This exchange is done between two parties when one individual has a good or service to sell and another individual wants to buy that good or service. Money is the typical currency utilized in modern economies, so let's take a closer look at how money functions.

3 Functions of Money as a Medium of Exchange

Because this lesson's main focus is on a medium of exchange, we will focus on that function first. I will then explain the other two functions as they relate to money as a medium of exchange.

When money is used to exchange goods and services, it is functioning as a medium of exchange. Money is used as a medium of exchange because both the buyer and the seller understand the value. This is beneficial because neither party is confused about its worth. For example, if one were to offer a cow as payment for a meal at McDonald's, there may be some confusion about the value of the cow. The buyer might think the cow is worth enough for the meal, but McDonald's may not agree.

Money also functions as a store of value. What this means is when you put money away for a while, it will still have the same value when it is finally used. For example, if you put $5.00 in your piggy bank with the intention of storing it, you know that when you go to retrieve it to use it as a medium of exchange, it will still be worth $5.00.

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