MONEY AND CREDIT
The concept of money as a medium of exchange is pivotal in the functioning of any modern economy.
In a barter system, two parties need to have exactly complementary needs for a transaction to occur. This condition is known as the ‘double coincidence of wants’. For example, if you want to trade shoes for wheat, you must find someone who not only has wheat but also needs shoes. This requirement makes transactions complicated and inefficient.
Money simplifies this process by acting as a universally accepted medium of exchange. The shoe manufacturer, in this example, only needs to find someone who wants shoes. He can sell the shoes and accept money in return. Then, he can use this money to buy wheat or any other goods or services he needs. Here, the ‘double coincidence of wants’ is not required, making transactions far simpler and more efficient.
Money’s nature allows for transactions where immediate exchange is not necessary. You can buy goods or services on credit, promising to pay later, which again is a flexibility not easily available in a barter system.