Let us make an in-depth study of Exchange of Money:-

1. Meaning of Exchange of Money 2. Definition of Exchange of Money 3. Characteristics 4. Conditions 5. Forms 6. Importance 7. Advantages 8. Disadvantages.

Meaning of Exchange of Money:

To-day Exchange is the connecting link between consumption and production. John Strachy has called it as “Heart of Economics”.

In ancient days man’s wants were very few. He led a very simple life and mainly lived on hunting and fishing and satisfied all his wants himself.


As time passed his wants multiplied and his self-sufficiency disappeared. He began to exchange some of the things he produced for those which neighbours possessed.

Such direct exchanges without the use of money are called Barter. To-day barter is carried on only in uncivilized and backward areas. In modern communities, we rarely come across exchange of this type. At present exchange work is done with the help of money.

Definition of Exchange of Money:

Exchange has been defined by various economists as follows:

1. According to Prof. Marshall – “Exchange may be defined as a lawful, voluntary and mutual transfer of wealth between the two parties, each transfer being in return of the other.”


2. As Prof. Jevons has said – “Exchange is the barter of comparatively superfluous with comparatively necessary.”

3. According to Prof. Waugh – “We can define an exchange as two voluntary transfer of ownership each made in consideration of the other.”

Characteristics of Exchange of Money:

Following are the characteristics of exchange:

1. Transfer of Wealth:


In exchange, there is always the transfer of wealth or goods, money or services. In the absence of transfer there cannot be exchange.

2. Legal Transfer of Wealth:

Wealth must be transferred legally. Any wealth trans­ferred in an illegal way cannot be called wealth.

3. Mutual Transfer of Wealth:

One sided transfer of wealth cannot be called exchange. It must be mutual and double sided.

4. Voluntary and Free Transfer of Wealth:

There need not be any pressure or coercion to transfer the wealth. It must be voluntary and without any fear or pressure.

Essential Elements or Conditions for Exchange of Money:

Essential elements or conditions for exchange are as follows:

1. There should be two parties:


For exchange minimum two persons are required otherwise the activities of exchange will not take place. Out of two persons one should be receiver and the other should be giver.

2. There should be at least two commodities:

Like two persons, there must be two or more commodities separately with them.

3. Possibilities of gain to both the parties:


In exchange both parties must get benefit. If any of the two will suffer loss then he will not agree for exchange.

4. Transfer of wealth:

Transfer of wealth is essential for exchange. Wealth may be either goods or money or services.

5. Voluntary transfer of wealth:


There need not be any pressure or coercion or undue influence in the transfer of wealth, it should be voluntary.

6. Transfer of wealth must be in a legal way:

Any illegal transfer of wealth will not be correct or valid.

7. There should be double coincidence of wants:

It means both parties must be in need of each other’s goods, otherwise exchange cannot take place.

8. There should be willingness to exchange:


Between the both parties otherwise exchange cannot take place.

9. Money is also essential:

In the modern time, presence of money has become essential for exchange. Exchange will not be possible if there is no money.

Forms of Exchange of Money:

There are two forms of exchange:

(1) Barter System.

(2) Money Exchange System.

(1) Barter System:


Barter system is that under which goods are directly exchanged with goods. In other words, Barter consists in the direct exchange of one commodity or services for another.

(2) Money Exchange System:

When exchange work is done through the medium of money then it is called money exchange system. At present this is the most common method of exchange.

Importance of Exchange of Money:

Exchange is an important branch of economic activities. Modern age is an age of specialisation. People want to specialise and produce one type of goods but in life several articles and goods are needed to satisfy the requirements of life. Therefore, exchange activities have been considered essential. In economics, Exchange has been named as “Connecting link between production and consumption”.

In our life production and consumption move together and one without the other will be ineffective in exchange activities. For economic development of a nation, exchange activities have been considered as an important tool.

Exchange gives this information what to produce and what not to produce. What type of production will be beneficial for the country and what will not be beneficial. To conclude it can be said that exchange activities are very important and essential for any country.

Advantages of Exchange of Money:

For the development of any country the activities of exchange must be convenient, easy and understandable.


Advantages of exchange are as follows:

1. Large Scale Production:

If there is any possibility of large scale production, it can be done only through exchange. By exchange, good qualities and modern machines can be purchased from other countries.

2. Division of Labour and Specialisation:

It is because of exchange, the geographical Division of Labour and specialisation has become possible. To-day every country is busy in producing such qualities of goods which can give maximum profit to the person concerned.

3. Satisfaction of Wants:

Through exchange one can get such qualities of goods which he himself cannot produce. It is through exchange, people can satisfy his wants.

4. Proper Utilization of Natural Resources:

It is through the medium of exchange that any country can properly utilise its available natural resources. Exchange can help in proper utilization of the resources and it can avoid the idleness.

5. Rise in the Standard of Living:

Activities of exchange have increased the standard of living of the people. Consumers get goods at cheaper price and this helps in increasing the standard of living.

6. Expansion of Market:


Easy methods of doing exchange have helped businessmen in increasing their business. Expansion of international trade has become possible only because of easy system of exchange.

7. Increase in Efficiency:

Exchange has increased efficiency in the workers. Competi­tion in the market increases efficiency and this is possible when there is exchange of views among producers regarding the goods.

8. Benefit to Both Parties:

Exchange activities give advantage to both parties. If both parties will not derive benefit then the activities of exchange will not flourish.

Dis-Advantages of Exchange of Money:

Important dis-advantages of exchange are as follows:

1. Economic Dependence:

Due to exchange one person becomes entirely dependent on other or one country depends on other for raw materials or food stuffs. If for any reason there is conflict between the two countries then the country will stop sending goods and this may put to trouble to the country.

2. Misuse of Natural Resources:

Because of exchange weak nations or small countries are put to trouble and they have to export materials under compulsion to strong and influential countries.

3. Cut Throat Competition:

On account of exchange, cut throat competition is to be seen in the market to sell their own products. Sometimes this may lead to loss to the person or to the nation.

4. Fear to War:

Because of conflict or difference between two countries, the exchange of necessary goods stops and this may give rise to war.