Standard of Value
Reviewed by Aug 27, 2020| Updated on
Standard of value refers to an agreed-upon medium of exchange, such as the USD (U.S. dollar) in international trade. The prices of all goods and services traded internationally will be denominated in the uniform standard of value. The standard of value ensures stability in trade and minimises currency fluctuations.
Understanding Standard of Value
Generally and traditionally, a commodity was adopted as a standard of value. The commodity was widely known, used, and accepted with stable value. Gold was used as a standard of value by the United States of America and many other countries.
However, the U.S. stopped using the gold standard in 1934 for domestic trade, and in 1971 for international trade. A system of currency exchange has since been adopted for domestic and international trade of most countries.
Historically, different metals, such as gold, silver, copper, and bronze, have been used by various countries as a form of currency and standard of value. A specific quantity of gold was designated with a value. The values of all other commodities are derived as fractions or multiples of the designated value.
The standard of value helps in rendering a consistent value to goods and services and a measurable appreciation or depreciation in the value of such goods and services. For example, the value of standard gold denominated in USD in international markets helps in determining an internationally accepted value and tracking the appreciation and depreciation in value.
The standard of value also facilitates ease of exchange of goods and services. The standard of value has replaced the barter system of conducting trade over a period of time. The barter system makes an inconsistent and subjective valuation of goods and services.
For example, in the absence of a standard of value, a farmer may have to exchange their produce for fertilisers or any other goods required by him.
An established standard of value facilitates trade and commerce within a country, maintains stability in the economy, and enables monitoring of price fluctuations. A standard of value is fundamental to the survival of the economy. It also helps in monitoring the growth in the economy.