Money as a medium of exchange

Before people started using money, it was customary to exchange goods and services. This is called barter. There are two main disadvantages to barter:

• the needs of the parties involved in the exchange must match in time
• there has to be a common perception as to the value of the goods or services to be bartered

Money can be used as an intermediate step in the barter process. That's why it is called a medium of exchange.

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