What Is Money of Exchange and Money of Account?

In economics, money is broadly defined as a commonly-recognized or institutionally-mandated asset used to buy and sell goods and services. In this respect, money allows for efficient exchange, eliminating the need for barter. Since prices denominated in money express value, money also serves as a measure of worth, as well as a means with which to accumulate wealth.

The barter system represents the nature of material exchange at its most fundamental level. Under a barter system, two parties agree to exchange a good or service in return for a good or service of similar value. For instance, party A may agree to exchange five laptop computers with party B in return for two large sofas. Though it is still possible to engage in the practice under a monetary system, its effectiveness is reliant upon each possessing something that the other wishes to acquire.

The term money encompasses any commodity which may be used to purchase goods and services. Money is also called a medium of exchange. For this reason, something used as money must be characterized as having value in an economy. Money allows two parties to engage in an exchange without the need for the double coincidence of wants that characterizes the barter system.

The money to which people commonly refer today is what is called currency. Currency is an asset which is issued in the form of paper or coins by a country's central banking authority. The sum of all currency issued in a country's economy has traditionally been backed by a supply of gold. By the last half of the twentieth century, this gold standard was eliminated in favor of currency backed solely by the faith of the holder.

Currency or any asset used to buy or sell goods or services is classified as money of exchange. Such currency is also called cash or liquidity. Currency that is accumulated, either physically or in a bank account, represents money as a store of value. It expresses extent to which someone is able to purchase goods and services.

In addition to its use as a medium of exchange, money is also used as a way of expressing value. Money, in this sense, is called money of account, because it serves as a benchmark by which people participating in an economy can grasp how much something is worth. When people describe someone as having a lot of money, they probably mean money of account. Money of account is important for assessing costs and expressing market value.