Store of Value

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Definition of Store of Value:

Store of value is the function of money that the median of exchange (money) retains its value and can be used at a later time.

Detailed Explanation:

Imagine if people traded in lettuce. It is difficult to store lettuce. Even when refrigerated, lettuce spoils within a week, so it has little store of value. You would spend your lettuce shortly after being paid! Normally, a country’s medium of exchange has a long store of value so that traders can use it as money for a long time. Currency usually retains its value, so an individual saving for a future purpose can be confident the value of their savings will not significantly change when the money is needed. However, this is not always true. During periods of extreme inflation, such as in Germany following WWI, a currency can become almost worthless. Under these conditions, many workers will spend their earnings immediately because the currency quickly loses its store of value. If vendors refuse to accept cash, people will resort to other assets, such as gold or silver as the favored medium of exchange. In 2008, inflation in Zimbabwe hit 231,000,000 percent. Imagine a candy bar that cost $1.00 in 2007, costing $2,310,000 one year later! People stopped using their money. Bartering became the norm. When they did pay with cash, the currency of choice was the American dollar.

Dig Deeper With These Free Lessons:

What is Money
Fractional Reserve Banking and the Creation of Money
Causes of Inflation
Monetary Policy – The Power of an Interest Rate

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