Money as a Medium of Exchange: Definition, Function & Examples

Money as a Medium of Exchange: Definition, Function & Examples
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  • 0:01 Definition
  • 0:27 Function
  • 1:12 Examples
  • 3:30 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Money serves several different functions in a modern economy. In this lesson, you'll learn that money is a medium of exchange and discover how it works in our economy. You'll also have a chance to take a short quiz after the lesson.

Definition

Money is a particular type of asset in an economy that people use to buy goods and services from other people or businesses. A medium of exchange is something that buyers will exchange with a seller when they want to purchase 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.

Function

Money actually serves several different key functions in our economy. It is a medium of exchange, a unit of account, and a store of value. In this lesson, we're focusing on the particular role money plays as a medium of exchange in the marketplace.

Money helps to facilitate trade because people in the economy generally recognize it as valuable. Since most people recognize money as valuable, they are willing to trade money for goods and services with the intention of one day using the money they received as a seller to buy goods or services from someone else. If people stop recognizing money as valuable, then it will cease to be a good medium of exchange because people will not be willing to trade goods or services for it.

Examples

Let's take a look at some examples to illustrate the concept and function of money as a medium of exchange. Imagine that you operate a small farm off the grid on the outskirts of a small town. You grow wheat and vegetables, and you have a couple of dairy cows and some pigs. You need some farming equipment, so you head into town to the local farm implement store where you offer to exchange several bushels of wheat for the equipment you need.

The owner of the store looks at you funny, and then politely tells you 'no.' He does offer to sell you the equipment for the amount of money listed on the price tags. Since you've been living off the grid, you don't have any money. You explain this to the store owner, and again, offer to trade your goods for his. He just shakes his head and says he has no use for your crops. In this example, you should see that money's power lies in the fact that people will almost always accept money in payment for a good or service. While our farmer may find someone who wants his crops, the potential buyer may not have what he needs, and the trade will not make sense.

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