A store of value refers to a commodity, asset, or form of money that maintains its purchasing power over time, allowing individuals to save wealth without the concern of significant depreciation. Such assets can effectively preserve wealth and facilitate intertemporal exchange by retaining their value.
What Makes an Asset a Store of Value?
Durability and Stability
An asset must be durable and stable to serve as a store of value. Durability ensures that the asset does not physically degrade over time, while stability means that its value remains relatively constant in terms of purchasing power.
Liquidity
Liquidity is critical as it allows the asset to be readily converted into a medium of exchange without losing much value.
Universally Accepted
For an asset to be an effective store of value, it must be widely recognized and accepted within a given economy or by a substantial segment of the population.
Types of Stores of Value
Commodities
Precious metals like gold and silver are traditional examples of commodities that serve as stores of value due to their intrinsic worth, limited supply, and historical usage as money.
Real Estate
Real estate properties, due to their physical presence and utility, often maintain and grow in value over time, making them a common store of value.
Financial Instruments
Bonds, stocks, and other financial instruments can act as stores of value depending on their risk profile, returns, and economic conditions.
Cryptocurrencies
Cryptocurrencies like Bitcoin are emerging as digital stores of value due to their limited supply and increasing acceptance, although they are highly volatile.
Historical Context and Examples
Historical Examples
Gold has been a significant store of value for thousands of years, favored by its rarity and inability to corrode. Similarly, land has historically been used to store value, given its permanence and utility.
Modern Context
In contemporary times, real estate, government bonds, and investment-grade securities are prominent stores of value, providing both security and potential appreciation.
FAQs About Store of Value
What differentiates a store of value from a medium of exchange?
A store of value preserves its value over time, while a medium of exchange is primarily used to facilitate transactions. While all stores of value can be mediums of exchange, not all mediums of exchange effectively store value.
Can a currency be a store of value?
Yes, a stable currency can be a store of value, provided it maintains purchasing power over time. Hyperinflationary currencies, however, fail to serve this purpose.
How does inflation affect a store of value?
Inflation erodes the purchasing power of assets, making it challenging for certain assets to act as effective stores of value. Assets that outpace inflation, such as real estate or inflation-protected securities, remain good stores of value.
Related Terms
- Medium of Exchange: An intermediary instrument used to facilitate the sale, purchase, or trade of goods between parties.
- Unit of Account: A standard numerical monetary unit of measure that provides a consistent way of quantifying value.
- Purchasing Power: The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.
- Inflation: The rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power.
Summary
A store of value is a critical economic concept, encompassing various assets that maintain their worth over time, thus ensuring economic stability and allowing individuals to save efficiently. By understanding the characteristics that make an asset a reliable store of value, individuals and investors can make informed decisions to protect their wealth from depreciation.
References
- Keynes, J.M. (1936). “The General Theory of Employment, Interest, and Money.”
- Fama, E.F. & French, K.R. (1992). “The Cross-Section of Expected Stock Returns.” Journal of Finance.
- Mankiw, N.G. (2019). “Principles of Economics.”
This coverage of the store of value ensures you comprehend its significance, applicability, and the various forms it can take, enabling informed financial and economic decisions.
