Money exchange systems

Thus, it is very important to understand money exchange systems. Before money, we had the barter system. Then we moved towards using coins and then finally we reached the present usage of notes.

We have been using money as an exchange system for the past century. You, yourself, have been using money in exchange for maybe a bar of chocolate, or stationary items or clothes, and so on. We exchange money constantly in our daily lives, so it is paramount to understand how money functions as a medium of exchange.

There was a time when notes were the only acceptable means of exchange. But after demonetization and the advent of digitalization, money exchange has seen new faces. UPI’s like Google Pay, PhonePay, PayTM amongst many are the top market players in allowing digital money exchange.

With time, people have seen a growth and change in the procedures of money exchange as well. However, before we jump to conclusions, let’s find out what money exchange is all about and decode the other pivotal factors, if any, that affect this exchange system.

What is a medium of exchange?

You buy a mobile from a store. You have few options to pay up – Debit or credit card, cash, or UPI payment methods. Now, this is an accepted medium of exchange. These are the different forms of money that hold value against the product that you wish to purchase.

A medium of exchange is any object that acts as a standard for sales, purchases, and trades of goods. An object can function as a medium of exchange only if it is accepted by everyone convoluted in the trade.

For example, all Indian traders recognize the Rupee (₹) as a medium of exchange. All their goods are valued as an amount in rupees. If a grocery store has bread, then it will sell it for a fixed amount of rupees. Thus, a medium of exchange is something that can be used to buy and sell other objects.

How does a medium of exchange work?

A medium of exchange works like the middle man in a trade. For example, during the rule of kings in our country, people were given gold and silver coins that they could use for trade. Say if someone had a lot of wheat and wanted to buy some cows.

They would go to the market to sell their rice for a certain amount of gold or silver coins. With these coins, they would go and buy the cows they wanted. This is how a medium of exchange works. In a barter system (we shall see this in a further section), you would need an exact need of someone else to make an exchange.

So, if you wanted to buy cows and have a lot of rice, you would need to find someone who needs rice and has cows to sell. But with a medium of exchange, you can sell your rice for a standard value and then use the return you get to buy cows.

Money as a medium of exchange

Once again let us consider three people A, B, and C involved in a trade. Person A wants to buy rice but he offers wheat in exchange because he does not have money. Person B wants wheat but he does not have rice with him to make an exchange with A. Person C has rice but does not want wheat in exchange.

The situation is difficult. Now let us introduce money in this situation. Person B goes to A and buys wheat from them. Person B gives A money in exchange for wheat. Person A now goes to C and buys rice and gives the money in exchange. C accepts the money because money can be used to buy something else in the bandying.

This is how money works as a medium of exchange. It can be used to buy and sell products, and people accept money because it can be used to buy things in the future. Just like C, who did not need anything but still sold their rice because the money they get in exchange can be used to get something they require in the future.

Alternative currencies as a medium of exchange

Throughout history, people have worked out alternatives to use as a medium of exchange. The best example that we are witnessing today is cryptocurrency.

Bitcoin, Dogecoin, Ethereum, and other such cryptocurrencies you might have heard being discussed in the news are alternatives to the cash that we use. Just recently a person purchased land for a certain amount of Dogecoin.

So, you can see that the buyer of the land and the seller agreed to use Dogecoin as an alternative currency as a medium of exchange. Similarly, in many rural villages in our country too, traders accept various other currencies as a medium of exchange.

Examples of money as a medium of exchange

A few examples of money as a medium of exchange;

• Buying a Ford Mustang for 74.6 lakh rupees
• Renting an apartment in Mumbai for 20 lakh per year
• Paying your fees at your school in exchange for education
• Subscribing to your telecom provider (JIO, Airtel, etc) for data and calling services.
• Going shopping for clothes during festival

In all these examples, you are not concerned with what the seller wants. You know the seller will accept money and you use it to get whatever product you want in exchange.

What is Bartering?

This is the oldest method of trade that humans took part in. It was a method born out of needs. The system worked on matching someone who needed something with someone who had that something.

Even cavemen have laid down evidence of using the barter system. It does not involve anything that acts as a medium of exchange. So, you don’t need money to take part in the barter trade. Well, then how do you get something? Let’s understand the barter system from a closer view.

Understanding bartering

The bartering system is a simple one. It looks to match two people who have something that the other wants. For example, a computer technician wants to repair his car and an auto mechanic wants to repair his computer.

What do you think they should do? They could go to the service centers and get the service they want and pay a fee. But they could choose to help each other and not spend hard cash. This is bartering.

The auto mechanic repairs the car and the computer technician repairs the computer. They fulfill their needs by exchanging their services, this is an example of barter trade. Earlier people used to trade only certain things like cattle, rice, wheat, crops, and other materialistic things. But today we can barter almost anything.

You may need a football and someone who has a football may need help setting up his Instagram profile. You can talk to them and if they agree, you can keep the football in exchange for dolloping and setting up their Instagram profile.

How to barter?

You want to go for barter trade. What do you need? The thing you don’t need is hard cash. Next, you have to identify what you need. Once you know that, you need to check what service or thing you can offer in exchange for what you want.

Now comes the most crucial step. You need to find someone who has what you need and needs what you are offering. After you find the person, decide mutually if both of you are satisfied with what you both are offering. If yes, proceed in the exchange, and congratulations, your barter trade is complete.

Benefits of barter?

Let’s have a look at the benefits of indulging in a barter system;

• Prevents the spending of hard cash: In the present pandemic, we have come to realize how important it is to have cash in hand. Bartering allows us to get what we want without having to spend cash. This keeps our spending in check and helps us during emergencies.
• Bartering helps develop a personal network: By involving yourself in barter trades, you can understand what people around you can offer you and how you can help them. This helps you to get to know people who can help you during your journey to becoming successful.
• Developing deeper personal connections is one more benefit of bartering: By constantly being involved in barter trades with someone you get to know them at a deeper personal level. Thus, bartering can help develop empathy and connections with the people around you.

Limits of bartering?

There are certain limits to everything and bartering is no exception. Let’s have a look at the limits of bartering;

• Unavailability of equal barter trades
• Establishing trade unions that allow barter trades with goods only up to a maximum value.
• Fees charged to buyers and sellers in professional barter trades
• Many of the barter trades today require the use of money for partial payment

How do companies barter?

Companies usually barter their services and products with other companies. This type of business model is known as the B2B model or Business-2-Business. Say, for example, an accounting company needs furniture so it makes a barter exchange with a wood manufacturer who gives them furniture in exchange for accounting services.

The present market is filled with companies doing barter trade, even more than individuals. Another example is the ads that you see on various apps. You might see two apps sharing each other’s apps on their apps. This is another example of a barter system being used by companies.

Modern barter exchange

A modern barter exchange is performed with virtually anything that a person has. It could be a digital currency, a photo, a vintage car, etc. Modern barter exchanges are also characterized by online barter exchanges happening on the net.

With the economies crashing in the current pandemic, the barter system has found another life and is growing rapidly. Modern barter exchanges are seeing exchanges worth more than a crore rupees taking place every day.

How individuals and countries barter?

Individuals barter based on their needs. Two individuals can take part in a barter trade if they have something that the other needs. For example, if you have an assemblage of cards that your friend wants and your friend has a puzzle game that you want then you both can exchange your items and that will be a barter trade.

Countries also barter like an individual. They exchange goods and services with each other. Let us take, for example, Thailand and Iran. Thailand grows a lot of rice and Iran has a lot of oil. So, Thailand gives Iran rice in exchange for oil. This is an example of barter trade between countries. Even India is looking to make barter trades for technology with South African nations like Venezuela in exchange for minerals like copper and gold.

Tax implications of bartering

In India, barter exchanges are treated as taxable transactions. A bit wordy right, let us go through an example to understand this better. An automobile manufacturing company A trades its old spare parts with scrap metal company B in exchange for new steel.

Now when A and B file their taxes, they will have to list this exchange also. But how much tax should they pay? Well, that depends on the amount of their exchange. If one kg of scrap steel is worth 12 Rupees and A gives B 20,000 kgs of it, then B will have to pay a tax on 2,40,000 Rupees (12 x 20,0000) since that is the value of the goods it got.

Now say, B gave 10,000 kgs of new steel to A and each kg is worth 24 Rupees, then A got goods worth 2,40,000 Rupees (24 x 10,000). Thus, A will pay tax on the 2,40,000 worth of goods. The value for both is the same because it is a barter trade so all the goods exchanged should have an equal value. A gave B 2,40,000 rupees worth of goods so B gave A the same worth of goods.

Examples of barter – Joon Beel Mela

One of the most prominent examples you can find of barter trade in India is in the northeast. In the northeast, in a small district of the Assam state, the barter system has been used for ages. In the Marigaon district, tribal people from nineteen different tribes come together to exchange one good for another.

The people are following a tradition from the erstwhile Gova kingdom. These people carry jaggery, rice, lentils, fishes, woollen clothes, and many more tribal ornaments. A head presides over the dealings as people agree to exchange and proceed with it.

The fiesta is a huge sight and people from all over the seven sister states in the northeast gather to witness and take part in it. It is the perfect example of how the barter system works.

You can know more about it too, just search for the Jonbeel Mela. Once the pandemic is over, you may even go to visit it when it occurs in mid-January and get a firsthand experience of the barter system.

Use of currencies as money

What is currency?

A piece of paper. That is what currency is actually, a piece of paper that is backed by the government and used throughout the country for transactions and trade. It is a medium of exchange and the most known form of money.

All of us have seen currencies like the Rupee we use. Some of us are also interested in collecting different currencies from different nations. These paper notes and coins are issued only by the government of a country and are legalized by the law of the country.

Understanding currency

Currency is in itself worthless. It is a piece of paper after all and as such has no value on its own. But it is issued by the government and this gives it value. The number we see printed on the currency notes or coins is called the face value of the currency, so if you see a 100 printed on a Rupee note, you will say that its face value is 100.

Different countries have different currencies. At present, the United Nations, a council of more than 190 countries, recognizes 180 different currencies. Currency is also used to judge the progress of a nation and to involve in foreign trade.

Knowledge Table!

Do you know the different currencies accepted in different parts of the world? Let’s have a look at this table and upgrade our sense of knowledge in terms of currencies!

Currency trading

Currency trading involves the selling and buying of currencies. We have learned that there are many currencies like Rupee, Dollar, Yen, etc. There are people and investment groups who buy these currencies and sell them also. Currencies oscillate a lot. They are constantly increasing or dwindling in value. Traders use this to their advantage to make money.

Currency exchange

While traveling you might have seen other passengers and even your guardian going to a counter and exchanging currency. When you travel to a foreign country, you are required to have the currency of that nation.

Say if you are traveling to the USA from India. You cannot use the Rupee in the USA, so at the airport or any bank in the country, you will have to exchange your Rupee for American Dollar. The exchange will not give 1 Dollar for 1 Rupee.

Rather there is a value of every currency that is measured against gold. So, in our scenario, 1 Dollar is equal to 72 Rupees. Hence, when you go to exchange 1 Rupees, for every 72 Rupees you will get 1 Dollar. That is how currency exchange works.

Did you know?

There are so many currencies that are stronger than the Indian Rupee and have a value worth fortunes. The table below discloses these currencies for you!

Money is a prominent force in our world. Today there are many modes in which money is used in the world. From small markets to huge forex trades, money is everywhere. As a responsible citizen, you should learn all the different aspects of money.
If you feel interested you can also choose to make a career in the money world as an accountant or forex trader and many other such roles. The world is constantly evolving and today we are seeing the birth of an even new currency, the virtual currency. In your free time, you should learn about currency as it is something that you will constantly be evolving with.

Money talks more than anything in this world. It is the most powerful tool that can buy you anything. So, keeping money and all its evolutions in mind is important now more than ever! Don’t just value money but know its value as well!