Standard of Deferred Payment

Definition

The standard of deferred payment refers to the unit of account used to measure and express the value of future payments or obligations. It allows for the postponement of payments and the ability to compare the relative worth of goods and services over time.

5 Must Know Facts For Your Next Test

1. The standard of deferred payment is one of the key functions of money, alongside being a medium of exchange and a store of value.
2. It allows individuals and businesses to make long-term contracts and commitments, as future payments can be denominated in the same unit of account.
3. The stability and reliability of the standard of deferred payment are crucial for the smooth functioning of financial markets and the overall economy.
4. The choice of the standard of deferred payment, typically a national currency, can have significant implications for economic policies and international trade.
5. The standard of deferred payment is closely tied to the concept of a unit of account, as it provides a common measure for the value of goods, services, and financial obligations.

Review Questions

• Explain how the standard of deferred payment is related to the function of money as a unit of account.
  • The standard of deferred payment is directly linked to money's function as a unit of account. As a unit of account, money provides a common measure for the value of goods, services, and financial obligations. The standard of deferred payment allows for the postponement of payments and the ability to compare the relative worth of these items over time. This enables individuals and businesses to make long-term contracts and commitments, as future payments can be denominated in the same unit of account, facilitating economic planning and decision-making.
• Describe the importance of the stability and reliability of the standard of deferred payment for the overall economy.
  • The stability and reliability of the standard of deferred payment are crucial for the smooth functioning of financial markets and the economy as a whole. A stable and reliable standard of deferred payment allows for the accurate valuation of assets, the establishment of long-term contracts, and the efficient allocation of resources. If the standard of deferred payment is unstable or unreliable, it can lead to uncertainty, increased transaction costs, and disruptions in economic activities, ultimately hampering economic growth and development.
• Analyze the potential implications of the choice of the standard of deferred payment for economic policies and international trade.
  • The choice of the standard of deferred payment, typically a national currency, can have significant implications for economic policies and international trade. The selection of the standard can influence a country's monetary policies, exchange rate policies, and the ability to engage in international trade and financial transactions. For example, a country with a stable and widely accepted standard of deferred payment may have more flexibility in implementing independent monetary policies and can participate more effectively in global trade and finance. Conversely, a country with a weak or unstable standard of deferred payment may face challenges in maintaining economic stability and integrating with the global economy.

Related terms

Unit of Account:

The unit used to measure and account for economic value, allowing for the comparison of the worth of different goods and services.

Deferred Payment: The postponement of a payment or obligation to a future date, rather than immediate settlement.

Monetary System: The framework of institutions, laws, and regulations that govern the use of money within an economy.