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Economics

How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Money & Credit

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Answer

In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. For a successful barter transaction, both parties needed to want what the other had to offer. Money provides the crucial intermediate step that eliminates the need for double coincidence of wants. Money serves as a common medium of exchange. Instead of directly swapping goods, people use money to buy and sell. This eliminates the need to find someone who is offering the goods that is needed and in turn offer him the goods that he wants. For example, a man wants to sell books in the market and buy wheat. It is difficult to directly exchange books for wheat without the use of money. He would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the books in exchange. Thus, money solves this problem of finding the right person.

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