Unit of Account
A unit of account is the measure in which prices, debts and accounts are expressed: the pound or the dollar today, a weight of silver or a measure of barley in the ancient world. It is one of the three classic functions of money.
Also called: unit of measure · money of account · numeraire
Money is usually defined by what it does: it serves as a medium of exchange, a store of value and a unit of account. The unit of account is the yardstick. A menu, an invoice, a loan agreement and a balance sheet all need one, and it is efficient for it to be the same thing people pay with, so that nobody has to convert every price before buying.
The three functions do not have to sit in one object. In ancient Mesopotamia values were reckoned in shekels, which began as a unit of weight for silver, and in measures of barley, while settlement could be made in other goods or in silver weighed out at the time. Medieval Europe kept accounts in pounds, shillings and pence long after no single coin was worth a pound. In high inflation, prices are often quoted in dollars while payment is still made in local currency, a common step towards dollarization.
For payment and FX businesses the unit of account decides who carries currency risk. An invoice priced in US dollars but settled in another currency leaves someone to bear the conversion. A stablecoin that tracks the dollar borrows the dollar's unit of account rather than creating a new one, and the IMF's Special Drawing Right is a unit of account that nobody spends at a shop counter.
In practice
Law can fix the unit of account for particular purposes, such as tax returns and statutory accounts, whatever currency a business actually trades in.
Example
A landlord in a high-inflation economy quotes rent at US$1,000 a month but is paid in local currency at that day's rate. The dollar is the unit of account; the local currency is the medium of exchange.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Unit of Account, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Medium of exchange | The unit of account is what prices are written in. The medium of exchange is what actually changes hands. They usually coincide but need not. |
See also
- Medium of ExchangeA medium of exchange is anything widely accepted in payment for goods and services, held not for its own use but because it can be passed on to someone else. It is the function most people mean by money, and the one that ends the need for barter.
- Store of ValueA store of value is an asset that keeps its purchasing power in a reasonably predictable way over time, so that wealth earned today can be spent later. It is one of the three classic functions of money, and many assets do it better than money.
- Double Coincidence of WantsThe double coincidence of wants is the condition barter requires: each party must have what the other wants, at the same time and in the right quantity. Money removes it by letting one side accept something it can spend later elsewhere.
- DollarizationDollarization is the use of a foreign currency, usually the US dollar, in place of or alongside a country's own for saving, pricing and payment. It can be official policy or something households and firms do on their own.
- Special Drawing RightThe Special Drawing Right (SDR) is an international reserve asset created by the IMF. It is not a currency and cannot be spent directly; it is a claim that a member country can exchange for US dollars, euros, yen, sterling or renminbi.