Store of value

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A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.[ citation needed ] More generally, a store of value is anything that retains purchasing power into the future.

Asset economic resource, from which future economic benefits are expected

In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash. The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.

Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would be the case today, indicating that the currency had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat money emitted by government sanctioned agencies.

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The most common store of value in modern times has been money, currency, or a commodity like a precious metal or financial capital. The point of any store of value is risk management due to a stable demand for the underlying asset. Money is one of the best stores of value because of its liquidity, that is, it can easily be exchanged for other goods and services. [1] An individual's wealth is the total of all stores of value including both monetary and nonmonetary assets. [2]

Money Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.

A currency, in the most specific use of the word, refers to money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. A more general definition is that a currency is a system of money in common use, especially for people in a nation. Under this definition, US dollars (US$), British pounds (£), Australian dollars (A$), European euros (€), Russian rubles (₽) and Indian Rupees (₹) are examples of currency. These various currencies are recognized as stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are defined by governments, and each type has limited boundaries of acceptance.

Commodity marketable item produced to satisfy wants or needs

In economics, a commodity is an economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such as chemicals and computer memory.

Money as a store of value

Various bills and coins Currency, Money,before Euro.jpg
Various bills and coins

Monetary economics is the branch of economics which analyses the functions of money. Storage of value is one of the three generally accepted functions of money. [2] The other functions are the medium of exchange, which is used as an intermediary to avoid the inconveniences of the coincidence of wants, and the unit of account, which allows the value of various goods, services, assets and liabilities to be rendered in multiples of the same unit. Money is well-suited to storing value because of its purchasing power. [1] It is also useful because of its durability. [3]

Monetary economics is the branch of economics that studies the different competing theories of money. It provides a framework for analyzing money and considers its functions, such as medium of exchange, store of value and unit of account. It considers how money, for example fiat currency, can gain acceptance purely because of its convenience as a public good. It examines the effects of monetary systems, including regulation of money and associated financial institutions and international aspects.

Medium of exchange is one of the three fundamental functions of money in mainstream economics. It is a widely accepted token which can be exchanged for goods and services. Because it can be exchanged for any good or service it acts as an intermediary instrument and avoids the limitations of barter; where what one wants has to be exactly matched with what the other has to offer.

The coincidence of wants lacking a medium of exchange, which have to rely on barter or other in-kind transactions. Double coincidence of wants means that the both the parties have to agree to sell and buy each commodities. The problem is caused by the improbability of the wants, needs, or events that cause or motivate a transaction occurring at the same time and the same place. One example is the bar musician who is "paid" with liquor or food, items which his landlord will not accept as rent payment, when the musician would rather have a month's shelter. If, instead, the musician's landlord were to throw a party and desire music for it, hiring the musician to play it by offering the month's rent in exchange, a coincidence of wants would exist.

Because of its function as a store of value, large quantities of money are hoarded. [4] Money's usefulness as a store of value declines if there are significant changes in the general level of prices. [5] So if inflation rises, purchasing power declines and a cost is placed on those holding money. [6]

Price quantity of payment or compensation given by one party to another in return for goods or services

A price is the quantity of payment or compensation given by one party to another in return for one unit of goods or services.. A price is influenced by both production costs and demand for the product. A price may be determined by a monopolist or may be imposed on the firm by market conditions.

Workers who are paid in a currency which is experiencing high-inflation will prefer to spend their income quickly instead of saving it. [3] When a currency loses its store of value, or more accurately when a currency is perceived to lose its future purchasing power, it fails to function as money. This causes people to use currencies from other countries as a substitute. [3]

Inflation increase in the general price level of goods and services in an economy over a period of time

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. The opposite of inflation is deflation.

Saving income not spent, or deferred consumption

Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is a lot higher; in economics more broadly, it refers to any income not used for immediate consumption.

Currency substitution Use of a foreign currency in parallel to or instead of a domestic currency

Currency substitution or dollarization is the use of a foreign currency in parallel to or instead of the domestic currency.

According to the Cambridge cash-balance theory, which is represented by the Cambridge equation, money's ability to store value is more important than its function as a medium of exchange. [7] Cambridge claims that the demand for money is derived from its ability to store value. This is contrary to Fisher economists' belief that demand arises because money is needed for exchange. [8]

The Cambridge equation formally represents the Cambridge cash-balance theory, an alternative approach to the classical quantity theory of money. Both quantity theories, Cambridge and classical, attempt to express a relationship among the amount of goods produced, the price level, amounts of money, and how money moves. The Cambridge equation focuses on money demand instead of money supply. The theories also differ in explaining the movement of money: In the classical version, associated with Irving Fisher, money moves at a fixed rate and serves only as a medium of exchange while in the Cambridge approach money acts as a store of value and its movement depends on the desirability of holding cash.

In monetary economics, the demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits rather than investments. It can refer to the demand for money narrowly defined as M1, or for money in the broader sense of M2 or M3.

Irving Fisher American economist

Irving Fisher was an American economist, statistician, inventor, and Progressive social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the Post-Keynesian school. Joseph Schumpeter described him as "the greatest economist the United States has ever produced", an assessment later repeated by James Tobin and Milton Friedman.

Other stores of value

Polish National Government bond, 1863 Bond of National Loan issued by Polish National Government 1863.png
Polish National Government bond, 1863
Commodities such as gold are good stores of value Gold-295936.jpg
Commodities such as gold are good stores of value

Examples for stores of value other than money are:

While these items may be inconvenient to trade daily or store, and may vary in value quite significantly, they rarely lose all value. It need not be a capital asset at all, merely have economic value that is not known to disappear even in the worst situation. The disadvantage for land, houses and property as a store for value is that it may take time to find a buyer for those assets. [6] In principle, this could be true of any industrial commodity, but gold and precious metals are generally favored, because of their demand and rarity in nature, which reduces the risk of devaluation associated with increased production and supply.

Speculative investments

Insofar as an investment is speculative, it should not be considered a store of value because it lacks stability. An asset should only be considered a store of value if it is stable against future purchasing power.

At various times throughout history, people and nations have famously made the mistake of believing that they could "store value" in speculative instruments, misunderstanding that ones personal choice to invest in a speculative asset does not automatically convert that asset into a proper and predictable store of value.

Examples of assets that are not traditionally considered stores of value:

See also

Related Research Articles

Financial capital is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, i.e. retail, corporate, investment banking, etc.

Commodity money Money with value derived from composition from a commodity (such as silver or gold coins)

Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves as well as value in their use as money.

Representative money any type of money that has face value greater than its value as material substance

Representative money is any medium of exchange that represents something of value, but has little or no value of its own. However, unlike some forms of fiat money, to be a genuine representative money, there must always be something valuable supporting the face value represented.

In economics standard of deferred payment is a function of money. It is the function of being widely accepted way to value a debt; thereby allowing goods and services to be acquired now and paid for in the future.

In economics, unit of account is one of the functions of money. The value of something is measured in a specific currency. This allows different things to compared against each other; for example, goods, services, assets, liabilities, labor, income, expenses. It lends meaning to profits, losses, liability, or assets.

Hard currency, safe-haven currency or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency's hard status might include the long-term stability of its purchasing power, the associated country's political and fiscal condition and outlook, and the policy posture of the issuing central bank.

Bullionism is an economic theory that defines wealth by the amount of precious metals owned. Bullionism is an early or primitive form of mercantilism. It was derived, in the 16th century, from the observation that the English state, because of its large trade surplus, possessed large amounts of gold and silver—bullion—despite the fact that there was no mining of precious metals in England.

Monetization is a term used to describe various processes.

The history of money concerns the development of social systems that provide at least one of the functions of money. Such systems can be understood as means of trading wealth indirectly; not directly as with barter. Money is a mechanism that facilitates this process.

Modern Monetary Theory is a heterodox macroeconomic theory that describes the currency as a public monopoly and unemployment as the evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. MMT is seen as an evolution of Chartalism, and is sometimes referred to as Neo-Chartalism.

Metallism is the economic principle that the value of money derives from the purchasing power of the commodity upon which it is based. The currency in a metallist monetary system may be made from the commodity itself or use tokens such as national banknotes redeemable in that commodity. The term was coined by Georg Friedrich Knapp to describe monetary systems using coin minted in silver, gold or other metals.

Commodity value

In the field of economics, the commodity value of a good is its free market intrinsic value under optimal use conditions. In a free market, the commodity value of a good will be reflected by its price. For example, if an acre of land can yield a net of 100 dollars loss by lying fallow, 50 dollars gain by being planted with corn, and 100 dollars gain by being planted with wheat, then that acre's commodity value is 100 dollars; the farmer is assumed to put his land to best use. The price of a commodity fluctuates around its commodity value.

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed against either the value of another single currency, a basket of other currencies, or another measure of value, such as gold.

Giacinto Auriti lawyer, essayist, political Italian

Giacinto Auriti was an Italian lawyer, essayist, and politician. He became famous for his monetary theory on seigniorage, which sees money from a different view - one that is of the jurisprudence. His idea theorized why currency has value and why it must be issued by governments and not banks. This ideal led to many public initiatives such as reform of the private banking system and the Bank of Italy.

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

References

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  2. 1 2 Mankiw, N. Gregory (2012). Essentials of Economics. Cengage Learning. p. 437. ISBN   1133418945 . Retrieved 2 January 2017.
  3. 1 2 3 Boyes, William; Michael Melvin (2011). Fundamentals of Economics. Cengage Learning. p. 295. ISBN   1133172997 . Retrieved 3 January 2017.
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  7. Economic Concepts and Methods. FK Publications. p. 297. ISBN   818859718X . Retrieved 4 January 2017.
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