Question

How does money solve the problem of double coincidence of wants?

Class XII
Money and Banking

Answer 1

In a barter system, commodities are exchanged with commodities without the use of money. But in this type of exchange, both parties have to agree to sell and buy each other's commodities. This is called double coincidence of wants. Money solves the problem of double coincidence of wants by acting as a medium of exchange. The transactions are made in money because a person holding money can easily exchange it for any commodity or service that he or she wants. For example, suppose an ice-cream vendor wants a bicycle but the bicycle manufacturer wants clothes, and not ice-creams. In such a situation the vendor can use money to obtain a bicycle. In the same way, the bicycle manufacturer too will use money to buy clothes.