Medium Of Exchange

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DEFINITION of 'Medium Of Exchange'

An intermediary instrument used to facilitate the sale, purchase or trade of goods between parties. In modern economies the medium of exchange is currency.

BREAKING DOWN 'Medium Of Exchange'

The use of a medium of exchange allows for greater efficiency in the economy and creates more trade in the economy. In a traditional barter system, trade between two parties could only occur if one had and wanted what the other party had and wanted, and vice versa. But the chances of this occurring at the same time are minimal. Let's say one party had a cow and the other had a lawn mower: with a medium of exchange such as gold coins, all the cow owner would have to do is find a buyer for the cow and she would receive gold coins. Then all she would have to do is find someone selling a lawn mower, which she could purchase with gold coins.

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