Money As A Standard Of Deferred Payment Online

Standard Of  Deferred  Payment

Money- we all toil throughout our life to earn it and achieve sustenance & prosperity. But, when you think in-depth, money is primarily a tool or instrument for affording goods & services. Money is a primary financial instrument in the modern economy. And with the advent of the banking sector & emerging financial markets, understanding the essential functions of money is vital for any economics student.

Apart from being a medium of exchange, money serves numerous other functions in a wide variety of scenarios & contexts. In this article, standard of deferred payment online MyAssignmenthelp.com’s economics experts investigate deep into the function of money as a standard of deferred payment. The standard of deferred payment is a crucial aspect of monetary transactions, and understanding the nuances involved is vital for a robust understanding of the economic machinery.

However, a brief recapitulation of the ideas behind currencies, functions, and key concepts is a prerequisite.

Money & Its Functions

Money is a financial instrument of exchange. It facilitates the barter system that’s the basis of all market economies to date. Money from commodities arose in ancient times as a tool for bartering and exchanging. Gold & silver coins, ivory shells, cocoa beans, etc., were some of the most prominent examples of commodity money.

With time, the system of commodity money gave way to the system of representative money. Banknotes came into being from gold & silver merchants or the banks of yore. The Song Dynasty of China was the first imperial economy to use representative money and did so quite successfully. As a result, the economy of the Song Dynasty was one of the most prosperous in the early world. Today, fiat money is the most prominent tool of economic exchange globally, wherein governments guarantee to pay the note bearer the net value of the money held. Fiat money is the modern iteration of representative money whose value does not depend upon any commodity or financial instrument.

Money can be a 'catch-all’ term for signifying anything chosen as a medium of exchange. However, that desired thing needs to be a commonly or officially accepted payment media for goods & services exchange and clearing debts.

• Money is generally accepted as a primary medium of exchange without any reference to the socio-economic standing of an individual.
• Many renowned economists define the term money by its general acceptability. Other definitions deem money to be a generally accepted means of exchange and a measure & store of value. The description of money is, thus, fundamentally functional.
• Money's functional and distinctively abstract character implies that anything can serve as a potential monetary candidate. If any entity is accepted as payment of goods and services, it can be identified as money.
• All current monetary systems are based on fiat money with no intrinsic value as a physical commodity. Instead, Fiat money is a government-declared legal tender acceptable as payment within certain legal & economic boundaries.

Such laws allow one to use fiat money to engage in goods & service trade within a nation that issues it. As a result, money is one of the most prominent forms of currency in any modern economy.

• A particular economy’s money supply consists mainly of currencies (banknotes and coins) and bank money (financial records of balance held in savings & checking accounts). Bank money is thus the largest supply of money in a particular nation.
• Any entity generally accepted as a monetary instrument must exhibit the following features.

• Fungibility: Units of a monetary entity need to be relatively uniform in quality to be interchangeable. If different entity units possess varying qualities, their value in transactions might not be reliable or consistent.

• Durability: The physical character of the entity should be durable enough to retain its usefulness in any number of future exchanges.

• Portability: It should be divisible into small quantities so that a worthwhile amount of the good can be conveniently carried or transported.

• Recognizability: The authenticity and quantity of the good should be readily ascertainable and acceptable by all users.

• Stability The value of a monetary entity should be relatively constant or increasing over time. A product or a service whose value varies widely up and down over time or consistently loses value is not suitable.

Besides being the primary form of exchange, money serves other prominent functions too. A popular rhyme in old economics text highlights the four central functions of money quite appropriately.

Money is a matter of functions four, a medium, a measure, a standard, a store!

Money has four prominent attributes and functions in the contemporary economy. They are:

• a medium of exchange, and a measure of value(the primary functions)
• storage of value and as a standard of deferred payment(the secondary functions)

There are certain contingency functions: measurement & distribution of national income, equalization of marginal utilities & productivities, the basis of credit and liquidity.

So, let us now take a closer look at one of the essential secondary functions of money, that is, its usage as a standard of deferred payment.

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Money As A Standard Of Deferred Payment

To understand the standard of deferred payment meaning, one needs to think a bit divergently about the different uses of money.

Now, money is one of the primary units through which future transactions & debts are settled. Any loan, investment and future contract are arranged and finalized in terms of money. That right there is an example of money as a standard of deferred payment. This essential secondary function of money is applicable across all use cases such as interests, rents, salaries, pensions, insurance premium, etc., any lending and borrowing process is performed or expressed in terms of the money involved.

The general acceptability and its capability to store & measure value is the primary reason behind money’s usage as a standard of deferred payment.

• Standards of deferred payment are the fundamental idea behind the process of credit. This function of money is intrinsic for the valuation of debt and central to the 'buy now, pay later
• As a standard of deferred payment, money bypasses the inconvenience and uncertainty involved in using commodities for transactions. Almost all kinds of money, commodity, representative and fiat, can be used for deferred payment.
• High inflation rates are a significant problem as they reduce the purchasing power of a country's currency or money. Money ceases to act as a reliable standard of deferred payment once inflation rates reduce its acceptability.
• The idea of money serving as a standard of deferred payment is nothing new. It was first conceptualized by the 19^th-century economist William Stanley Jevons. Jevons was the one who considered the standard of deferred payment to be a principal function of money, albeit secondary.
• Debts are one of the most common forms of deferred payment. Any form of money can be used to settle debts, but value & purchasing power are prominent factors. Inflation and deflation rates can cause fluctuations in the value of money. As a result, the overall value of the deferred payments can change with those rates.

• Deferred payments are prevalent across all economies. They have postponed payments that will be fulfilled in the future and involve different debts, borrowing, lending & transactional activities.

Money can act as a standard or instrument for assuring sure-fire payments in the future. Millions of transactions occur each day, and many among them do not involve immediate, upfront payments. Money simplifies those transactions and lending activities and leads to the rise of different financial systems & institutions.

• Standards of deferred payments are generally accepted methods of settling debts. For example, Fiat money is currently a globally accepted currency for setting up deferred payments. However, anything can be the preferred standard for deferred payment for illegal transactions such as weapons & drugs.
• The standard of deferred payment function of money is quite distinct from its role as a storage of value.The store of value function relates to storing, saving, and retrieving value from acquired money. It is also distinct from the medium of exchange and measures of account function.

When an economy is stable and inflation rates are under control, money can serve all four functions.

• High inflation, uncertain economic conditions and volatile financial capital mitigate the acceptability of money as a standard of deferred payment.Therefore, it is essential to identify a single reliable standard of deferred payment in such cases.
• Deferred payments such as debts & investments are legally binding and enforceable by acts of rules, regulations, and authorities. However, the enforceability of debts by the rule of law is rarely used when the likelihood of recollecting debts is quite unlikely.

Precious metals, precious stones, real estate, luxury goods and even individuals are often used as standards of deferred payments when illegal goods & services are involved.

And that brings us to the conclusion of this write-up. Hope it was informative and enlightening enough for all readers.

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