Store of value

Definition

A store of value is an asset that can maintain its value over time, allowing individuals to save and defer consumption to a future date. It plays a critical role in the economy by providing a means for individuals and businesses to preserve purchasing power, thus ensuring that money or assets do not lose their value due to inflation or other economic factors. This function is essential for facilitating savings and investment, as it influences decisions on spending and consumption.

5 Must Know Facts For Your Next Test

1. For something to serve as a store of value, it must be durable, easily transferable, and maintain its purchasing power over time.
2. Common examples of stores of value include cash, real estate, gold, and other precious metals.
3. While money is primarily used as a medium of exchange, its ability to act as a store of value can be impacted by inflation.
4. Cryptocurrencies like Bitcoin are increasingly being considered as alternative stores of value due to their limited supply and decentralized nature.
5. The effectiveness of a store of value can be influenced by external factors such as economic stability, government policies, and market demand.

Review Questions

• How does the concept of store of value relate to the overall functions of money in an economy?
  • The store of value function complements the other primary functions of money: medium of exchange and unit of account. While money is used for transactions and measuring value, its role as a store of value ensures that people can save wealth without losing purchasing power over time. This stability encourages savings and investments, which are crucial for economic growth. Without a reliable store of value, individuals may be less inclined to save, affecting overall economic stability.
• In what ways can inflation impact the effectiveness of money as a store of value?
  • Inflation directly affects the purchasing power of money; when inflation rises, the same amount of money buys fewer goods and services. This erosion means that if people hold cash as their primary store of value during high inflation periods, they may find their savings diminish in real terms. Consequently, individuals may seek alternative stores of value like real estate or commodities that tend to retain their worth better than cash during inflationary times.
• Evaluate how emerging technologies like cryptocurrencies challenge traditional views on what constitutes a store of value.
  • Emerging technologies like cryptocurrencies are reshaping perceptions of traditional stores of value by introducing decentralized digital assets with unique properties. Unlike fiat currencies that can be subject to inflationary pressures from government policies, cryptocurrencies like Bitcoin have capped supplies which can enhance their appeal as stores of value. However, their volatility raises questions about reliability compared to traditional stores like gold or real estate. As these technologies gain acceptance, they force us to reconsider how we define security and trust in our stores of value.

Related terms

medium of exchange:

A medium of exchange is an intermediary instrument used to facilitate the sale, purchase, or trade of goods between parties.

unit of account:

A unit of account is a standard numerical unit of measurement that provides a consistent measure of value for goods and services.

inflation:

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.