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A unit of account is a standard numerical unit of measurement for the market value of goods, services, and other transactions within an economy. MODERN USUAGE In modern economies, Currency serves as a standard unit of account with respect to all market activity; establishing price. A majority economic statistics are culculated using currency as a unit of account, including the GDP and the GNP. The most widely-known currencies circulated are the U.S. Dollar and the Euro . Historical units of account included commodities such as gold and silver. In Economics (discipline) , the concept of a Composite Good is used as a unit of account in an analysis of a two-good market. The composite good represents an aggregation of all other oppurtunities that are not realized by the first good. ADVANTAGES Economies that have a unit of account are able to rank the value of all goods and services against each other and as a result better facilitate economic coordination. An economy without a standard unit of account is forced to use a barter system to conduct all trade. Barter transactions require a double-coincidence of wants of between both parties. Each market participant needs to understand and trade for not only for his own needs, but also everyone else's. This creates additional search and transaction costs. As economies grow more complex, the search and transaction costs associated with the higher number of goods rises exponentially. As a result, the economic inefficiency inherent in a barter system acts as a natural limit to its growth. By setting an economy's unit of account to a single commodity, trade can be greatly improved by reducing search and transaction costs. Each market participant needs only to understand and trade for his own needs plus the one designated commodity. As a result search costs are dramatically reduced. An additional benifit can be realiezed by setting an economy's unit of account to currency. Currencies are generally superior to commodities in trade because they are more portable and fungible. The adoption of curriciencies reduces the transaction costs associated with trade dramatically. MISCELLANEOUS It might be suggested that the Electron might be the ideal unit of account, in an aggregate form such as the Kilowatt Hour . While it is a poor Medium Of Exchange except on Power Grid s, and a very poor Store Of Value even in a Fuel Cell , and possibly only a fair Standard Of Deferred Payment , it would be very hard to argue that there had been a change in the nature of an electron that rendered it less stable or useful than it was when it was first put upon account. SEE ALSO |
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