Medium of exchange

A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.

By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and where it is offered, so that the exchange can occur. A medium of exchange permits the value of goods to be assessed and rendered in terms of the intermediary, most often, a form of money widely accepted to buy any other good.

Definition

Fiat currencies are the generally accepted mediums of exchange. Their most important and essential function is to provide a 'measure of value'... Hifzur Rab has shown that the market measures or sets the real value of various goods and services using the medium of exchange as unit of measure i.e., standard or the yard stick of measurement of wealth. There is no other alternative to the mechanism used by the market to set, determine, or measure the value of various goods and services. Determination of price is an essential condition for justice in exchange, efficient allocation of resources, economic growth, welfare and justice. The most important and essential function of a medium of exchange is to be widely acceptable and have relatively stable purchasing power (real value). Therefore, it should possess the following characteristics: