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Money as a medium of exchange

  • A person holding money can easily exchange it for any commodity or service that he or she desires.

  • Money acts as an intermediary for the goods and sevices in an exchange .

  • Therefore, every one prefers to receive payments in money .

The barter system

  • In a barter system goods are directly exchanged without the use money.

  • Barter system was a system of exchange that was prevalent before the use of money .

  • Barter system has many problems such as double coincidence of wants, which means what a person desires to sell is exactly what the other wishes to buy.

  • There may be many people wanting and many possessing those goods wanted, but to allow of an act of barter system there must be a double coincident of wants.

Importance of money

  • Money has solved the problems associated with the barter system.

  • In an economy where money is in use , money by providing the crucial intermediate step eliminates the need for double coincidence of wants.

  • Exchange becomes convenient and simple by using money.

  • It saves lots of time as well as labour.

Modern forms of money


Currency :

  • Includes paper notes and coins

  • Not made of precious metal such as gold,silver and copper

  • Unlike grains and cattle, they are not of everyday use.

  • The modern currency is without any use of its own.

  • It is accepted as a medium of exchange because the currency is authorised by the government of country.

  • In India the Reserve Bank of India issues currency notes on behalf of central government.

  • As per Indian law no other individual or organisation is allowed to issue currency.

  • Rupee is widely accepted as a medium of exchange because in India law legalises the use of rupee as a medium of exchange.

Deposits with Banks:

  • Banks accept the deposits and also pay an interest on the deposits.

  • People's money is safe in the bank

  • Deposits in the bank account can be withdrawn on demand, and therefore are called demand deposits.

  • A cheque is a paper instructing the bank to pay a specific amount from the person's account to the person i whose name the cheque has been issued.

  • By using cheque facility , payments can be done without using cash.



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