In Economics, “standard of deferred payment” is a function of money that indicates a widely accepted way to value a debt such that a person can acquire goods at present and pay for them in the future. Standard of deferred payment is considered to be a direct result of two other functions of money namely “store of value” and “unit of account”. However, for money to function as a deferred payment standard, it must retain value, it must also store value.
Definition of Standard of Deferred Payment
Standard of deferred payment is one of the four functions of money. Here, money is used as a standard benchmark or a contract for specifying future payments for current purchases. In other words, standard of deferred payment is an accepted way to settle debt in a given market.
Standard of deferred payment conveys contrast from the elements of cash which is a quick mechanism of trade or store of significant worth; while Standard of deferred payment goes about as a medium by which future installments will be made.
Functions of money
There are four basic functions of money:
As mentioned above, money serves as a unit of account, providing a common measure of the value of goods and services being exchanged. Everybody around the world thinks about cash profitable. It's a painful way for sellers to esteem stock and endeavors and buyers to choose if the estimation of the incredible benefits exchanging for money.
Apart from serving as a unit of account, money readily acts as a medium of exchange to facilitate transactions. It fills in as a medium trade that is acknowledged in all exchanges, by all gatherings, paying little respect to whether they want every others' products and enterprises. In contrast to the trade framework, where the trading of products relied on a twofold fortuitous event of needs, cash is free from any such reliance and enables a client to fulfill his/her arrangement of necessities.
- Standard of deferred payment:
As mentioned earlier, the standard of deferred payment is also one of the functions of money. Money facilitates the acts of borrowing and lending. Since money enables current transactions to be discharged in future, it has become a standard of deferred payments.
Money also serves as a store of value or a store of purchasing power. It tends to be held over some undefined time frame and used to back future installments. Moreover, when individuals set aside some cash, they get the confirmation that the cash spared will have esteem when they wish to spend it later on.
How Does The Standard Of Deferred Payment Work?
Deferred payments are the payments which are postponed for the future. In the case of these payments, money enables current transactions to be discharged in future. You’ll be able to understand this concept better with the help of an example.
Let’s take the example of a business and consumers where the money would be used as a standard of deferred payment. Suppose, a business, say, an electronic store starts running promotional sales and offers. That’s when it would use deferred payments to entice new customers. Wondering how? Well, the store would probably offer a deferred payment plan for the first five months when a consumer buys a new appliance. Due to this, the customer would be requireed to make only interest payments for the first five months. Once these five months end, the customer is required to make regular payments for the duration of the consumer agreement.
Relation of Debt with Standard of Deferred Payment
Debt is a form of deferred payment. Since the value of money fluctuates over time via inflation and deflation, the value of deferred payments (the real level of debt) also fluctuates. A device is termed "legal tender" if it serves as a medium to pay off debts. The US dollar is one of the best examples of “legal tender” as it is not backed by gold or any other commodity but can be used to pay off debts.
So, these were the basics of “Standard of deferred payment”. Sound quite easy, don’t they? Well, that’s not what a student pursuing a higher degree in Finance would think. That’s because such students find it quite hard to juggle with the lengthy syllabus, exam pressure and an additional burden of assignments on topics like “Standard of Deferred payment”. There may be a lack of clarity of concepts even after attending long lectures. That’s when there’s a need to rush to the library to search for the best books like:
- Money and Banking: A Policy - Oriented Approach By Dean Croushore (published by Cengage Learning, 2006)
- ECONOMIC ENVIRONMENT OF BUSINESS By Veena Keshav Pailwar (published by PHI Learning Pvt. Ltd., 2011)
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