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Concept
Medium of exchange
Summary
In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency.
The origin of "mediums of exchange" in human societies is assumed to have arisen in antiquity as awareness grew of the limitations of barter. The form of the "medium of exchange" follows that of a token, which has been further refined as money. A "medium of exchange" is considered one of the functions of money. The exchange acts as an intermediary instrument as the use can be to acquire any good or service and avoids the limitations of barter; where what one wants has to be matched with what the other has to offer.
Most forms of money are categorised as mediums of exchange, including commodity money, representative money, cryptocurrency, and most commonly fiat money. Representative and fiat money most widely exist in digital form as well as physical tokens, for example coins and notes.
Barter#Limitations
In a barter transaction, one valuable good is exchanged for another of approximately equivalent value. William Stanley Jevons described how a widely accepted medium allows each barter exchange to be split into three difficulties of barter. A medium of exchange is deemed to eliminate the need for a coincidence of wants.
A barter exchange requires each party to a transaction to have something the other desires. A medium of exchange removes that requirement, allowing an individual to sell and buy from various parties via an intermediary instrument.
A barter market theoretically requires a value being known of every commodity, which is both impractical to arrange and impractical to maintain. If all exchanges go 'through' an intermediate medium, such as money, then goods can be priced in terms of that one medium. The medium of exchange allows the relative values of items in the marketplace to be set and adjusted with ease. This is a dimension of the modern fiat money system referred to as a "unit of account"
A barter transaction requires that both objects being bartered be of equivalent value.
Official source
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