What is Standard of Value?
Standard of value is an agreed-upon worth for a transaction in a country's medium of exchange, such as the U.S. dollar or Mexican peso. A standard of value allows all merchants and economic entities to set uniform prices for goods and services. This standard is necessary in order to maintain a stable economy.
- A standard of value is an agreed-upon worth for a transaction in a medium of exchange, such as the U.S. dollar or gold.
- A standard of value is needed so the value of goods and services can be consistently determined.
- Without a standard of value, other ways of exchanging goods may arise, such as a barter system.
Understanding Standard of Value
Until the 20th century, gold was the standard of value in many countries. The U.S. went off the gold standard domestically in 1934 and internationally in 1971. A a system of floating exchange rates for currency is now used instead.
Typically, a standard of value is based on a commodity that is widely known and used, allowing it to serve as a measure for other commodities. For example, metals such as gold, silver, copper, and bronze have been used across history as forms of currency and standards of value. Giving a set value to a specific quantity of gold—and then framing other commodities as multiples or fractions of that value—allows for other disparate items to be granted value within the same economy.
How a Standard of Value is Applied
By using such standards, the value of other goods and services can be determined in a relatively consistent manner regardless of the differences among those goods and services. The value of a luxury car, for example, can be set just as readily as the value of a pair of running shoes. The scale of value for these items is drastically different, as is their function and use. The establishment of a standard of value for currency, in particular, allows for easy exchange between individuals, merchants and customers, and businesses.
If an economy lacks such a standard of value, it may be common to see a barter system employed to govern trade and commerce. This may mean the assigned value of goods or services could be highly subjective and variable. For example, without a standard of value, a farmer who produces vegetables may have to barter directly to acquire goods they need, such as lumber or fertilizer. The value of the vegetables offered in trade would require some form of agreement between the parties, since a standard of value is not available to set parameters for the exchange.
Even with a standard of value, the assigned worth of a commodity may still fluctuate. The existence of the standard, however, maintains a degree of cohesion and consistency across the economic system, barring a highly disruptive influence on the market.