Question

Explain the difference between the terms in each of these pairs. a. standard of value store of value b. commodity money representative money c. demand deposits near money

Short answer

Standard of value measures worth; store of value preserves value. Commodity money holds intrinsic worth; representative money represents redeemable value. Demand deposits are immediately accessible; near money is easily convertible.

Step-by-step solution

Define 'Standard of Value'

A standard of value is a common measure that allows people to compare the values of goods and services. It provides a consistent way to express prices and can be associated with a particular currency or measurement unit.

Define 'Store of Value'

A store of value is an asset or commodity that maintains its value over time and can be saved, retrieved, and exchanged in the future without losing purchasing power. Typical examples include currencies, precious metals, or real estate.

Compare 'Standard of Value' and 'Store of Value'

The main difference is their purpose: the standard of value is used for pricing goods and services, while the store of value is used to preserve wealth over time. A standard of value helps with the exchange, whereas a store of value helps in preserving purchasing power.

Define 'Commodity Money'

Commodity money is a form of money that has intrinsic value; its worth comes from the material it is made from, like gold or silver. It can be used directly for trade or other purposes beyond serving as money.

Define 'Representative Money'

Representative money is a type of currency that represents a claim on a commodity, which can be redeemed. It has no intrinsic value itself but is backed by a physical commodity kept in reserve, like gold certificates or paper currency backed by gold or silver.

Compare 'Commodity Money' and 'Representative Money'

Commodity money is valuable on its own due to its physical materials. In contrast, representative money derives its value from being exchangeable for a commodity or backed by a valuable resource. The backing gives representative money its value rather than the material itself.

Define 'Demand Deposits'

Demand deposits are bank account balances that can be accessed on-demand by the account holder, typically through checks or debit cards. They are part of the money supply used in transactions but do not earn interest.

Define 'Near Money'

Near money refers to liquid assets that can easily and quickly be converted into cash but are not directly used for transactions. Examples include savings accounts, treasury bonds, or money market funds.

Compare 'Demand Deposits' and 'Near Money'

Demand deposits are directly accessible to make transactions, while near money requires conversion to cash and often involves interest-earning, adding liquidity but not immediacy for transactions.

Key concepts

Standard of Value

The concept of a "standard of value" is crucial in understanding how we assign worth to different goods and services. This standard acts as a common benchmark, enabling people to measure and compare the value of various items. Think of it as a yardstick for economic transactions. It provides a consistent way to express the price of goods, making it easier for people to understand and agree on costs. For example, if a cup of coffee is priced at $5, the dollar serves as the standard of value, giving everyone a clear idea of what the coffee is worth in the marketplace. Using a standard of value simplifies exchanges and helps maintain an organized economy.

Store of Value

A "store of value" is something that can retain its value over time, allowing you to save and retrieve it in the future without losing purchasing power. This is important for preserving wealth since you want to ensure that what you save today will hold the same value when you use it later. Common examples include precious metals like gold, currencies, or even real estate. For instance, keeping your savings in gold may protect you against inflation, as gold is likely to maintain its value over time. This stability makes store of value essential for both individual savings and broader economic health. It's like having a safe deposit box for your wealth that ensures what you save doesn’t depreciate.

Commodity Money

Commodity money refers to physical items that have intrinsic value. This means the money itself is valuable because of the material it's made from. Common forms of commodity money might include gold, silver, or other precious materials. These items can be used just as they are in economic transactions because they hold value by themselves. The U.S. silver dollar is an example; its worth is tied to the actual amount of silver it contains. Commodity money is reliable since it carries value regardless of how it's used, making it a universally accepted form of payment in ancient trade systems and even in some modern scenarios.

Representative Money

Representative money represents a claim to a commodity that can be redeemed, rather than having value in itself. For instance, paper money that can be exchanged for gold or silver is a type of representative money. Though the paper money may not have intrinsic value, its worth comes from being backed by a tangible asset kept in reserve. This type of currency is convenient for transactions, as it eliminates the need to carry heavy commodity money. Representative money played a significant role in historical economies, such as the use of gold certificates in the early 20th century, and still influences modern money systems in various forms.

Demand Deposits

Demand deposits are funds in bank accounts that you can withdraw at any time without advance notice. These deposits are typically accessible through checks or debit cards, allowing easy and immediate transactions. Unlike savings accounts, demand deposits do not earn interest, but their liquidity makes them a vital part of the money supply. For example, your checking account is a form of demand deposit, allowing you direct access to your funds for daily spending as needed. This immediate access makes demand deposits a key component of modern financial systems.

Near Money

Near money includes assets that are not cash but can be quickly converted into cash with little loss of value. These assets, such as savings accounts, treasury bonds, or money market funds, are almost as good as money. The advantage of near money is that it often earns interest, unlike demand deposits, contributing to the overall liquidity of your finances. However, converting near money into cash often takes some time, usually a few business days, making it less immediate compared to demand deposits. Think of near money as a buffer that provides a safeguard for your wealth, ensuring you earn returns while maintaining flexibility in cash readiness.