Standard Of Value

Last Updated :

Blog Author :

Edited by :

Reviewed by :

Table Of Contents

Standard Of Value Definition

Standard of Value in economics typically refers to a reference or medium of exchange that is widely accepted as a standard in economic transactions in a country. This value can be used to set a uniform system of pricing for all commodities traded within an economy.

A uniform medium of exchange is necessary for the proper functioning of an economy and the everyday financial transactions that takes place across it. It facilitates the easy undertaking of monetary exchanges, smooth circulation of goods and services and enhances overall accountability.

Standard Of Value Definition

A standard value can refer to a common medium of exchange in financial transactions that takes place within the borders of a country. It is necessary for the smooth functioning and maintenance of a stable economy.
The primary application of a standard of value is to provide individuals, businesses, organizations and goverments a uniform standard of commodity pricing.
Unlike the standard of value, a store of value is an asset that has a means to preserve its worth without depreciating over time.

Standard Of Value Explained

The standard of value is an economic benchmark used as a uniform measurement mode in financial activities. Historically, the use of precious metals such as gold and silver as standards of value was common, as people considered them valuable and in limited supply. In many cases, coins made from these metals were used as currency, and their value was based on the weight and purity of the metal.

Paper currency has largely replaced commodity-based currencies in modern times, but the concept of a standard of value remains important. In most countries, the standard of value is the local currency, which serves as a medium of exchange, a store of value, and a unit of account. One can typically determine the currency's value by supply and demand in the foreign exchange market. It can fluctuate based on various economic and political factors.

Applications

These standards find applications in goods and services by providing a common measure of worth that allows buyers and sellers to compare prices and make informed decisions about purchases and investments. This common measure can take many forms, depending on the context and the goods or services.

For example, in a market for agricultural products, this value might be based on the price of a particular crop, such as wheat or corn. This would allow buyers and sellers to compare the prices of different crops and make decisions based on their relative value. Similarly, in a market for luxury goods, a standard of value might be based on the price of a particular brand or product, allowing buyers and sellers to compare the value of different items.

In addition to providing a common measure of worth, a standard can also help to facilitate trade and commerce by reducing transaction costs and increasing market efficiency. For example, if buyers and sellers in a market have a shared understanding of the this standard, they may be more likely to agree on prices and transact more quickly and efficiently.

Examples

Let us look at the standard of value examples to understand the concept better:

Example #1

In a hypothetical economy, let us say one unit of gold is the standard of value. This means that the country has fixed its value and uses it as a reference point for pricing other goods and services. For instance, if the value of one unit of gold is $100, then a loaf of bread might be priced at 0.01 units of gold ($1), a shirt at 0.2 units of gold ($20), and so on. This system allows for the relative values of different goods and services for one to easily compare and trade within the economy.

Example #2

As a standard of value, the United States Dollar (USD) plays a crucial role in the global economy. It serves as the primary currency for international trade, investment, and financial transactions. The USD's status as a reserve currency means that many central banks around the world hold USD as part of their foreign exchange reserves, further solidifying its importance.

Being the world's primary reserve currency, the USD is widely accepted and used for pricing commodities such as oil and gold. Its stability and liquidity make it a preferred choice for conducting business transactions across borders. Additionally, many countries peg their own currencies to the USD or use it as a reference point for setting exchange rates.

The USD's status as a standard of value provides stability and predictability in international markets, facilitating smoother global trade and investment flows. However, fluctuations in the value of the USD can have significant implications for economies worldwide, influencing inflation, interest rates, and overall economic growth.

Standard Of Value vs Store Of Value

The difference between the two are as follows:

Standard of value is a common unit for monetary transactions and commodity pricing in an economy. On the other hand, a store of value is a means of preserving wealth over time. This may take the form of a commodity such as gold or silver, which has intrinsic value and can be stored and traded to preserve wealth.
The key difference between a standard of value and a store of value is that the former is a common measure of worth of goods and services, while the latter can be an asset that doesn't loses its worth.
A standard of value is useful for facilitating trade and commerce, while a store of value protects against inflation and other economic risks.

Frequently Asked Questions (FAQs)

1. How does money serve as a standard of value?

Money can be a standard of value because it provides a common measure of the worth of different goods and services. In other words, it allows people to compare the value of one good or service to another in a standardized way. Overall, money serves as a standard because it provides a widely accepted measure of the value of goods, facilitating trade and economic activity.

2. What are the three standards of value?

There are generally three standards of value that are used to measure the worth of goods and services:

• Commodity Standard: Under this standard, the value of money is directly linked to the value of a commodity, such as gold or silver. In a commodity-based monetary system, the value of a currency depends on the amount of the commodity that is backing it.
• Fiat Standard: Under this standard, the value of money is not linked to any physical commodity but is instead based on the government's declaration that it is legal tender and can be used to pay debts. The value of fiat currency depends on supply and demand in the market.
• Representative Standard: Under this standard, the value of money is represented by a physical commodity, such as a gold or silver certificate. One can redeem the certificates for the underlying commodity, which guarantees the currency's value.

3. What is the measure of the standard of value as a function of money?

The measure of these values as a function of money refers to money's ability to serve as a common unit of measurement for the value of different goods and services. In other words, money serves as a yardstick for measuring the worth of various items.
The value of money as a measure of standard of value can be decided by its purchasing power, which is the amount of goods and services that can be purchased with a given amount of money. As the price of goods and services changes over time due to inflation or deflation, the purchasing power of money also changes.