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Sunday, 18 October 2009

Medium of Exchange

Money performs the following three functions:

1. Medium of exchange
2. Store of value
3. Unit of account

1. Medium of Exchange

Money has the basic function that it is a medium of exchange of equivalent real values at the moment of exchange. It overcomes the inconveniences of a barter economy where there must be a coincidence of wants before a trade can take place. For a trade to take place in a barter economy one person must want exactly what the other person has to offer, at the exact time and place where it is offered.

In a monetary economy the real value of goods and services are measured in terms of money, the monetary medium of exchange, which is generally accepted to buy any other good or service. Without this function or attribute the invention cannot be money.

We use payment with money instead of barter to exchange real values in our economies in the transactions we enter into when we buy and sell goods, services, ideas, rights and any kind of property whether physical, virtual or intellectual. Money is the lifeblood of an economy even though it is continuously changing in real value. Without money the creation and exchange of real value in an economy would be severely restricted, as it would become a barter economy.

Kindest regards,

Nicolaas Smith