Unit of Account¶
The unit of account function describes money's role as a standard measure of economic value. Just as meters measure distance and kilograms measure weight, money provides a common denominator for pricing goods and services.
The Need for Standardized Measurement¶
In a barter economy, value exists only in relative terms. How many chickens equal one cow? How much wheat equals one iron tool? With n goods in an economy, participants must track n(n-1)/2 exchange ratios - an impossible cognitive burden as economies grow.
Money solves this by serving as a universal reference point. Instead of memorizing thousands of barter ratios, economic actors need only know each good's price in monetary units. This dramatic simplification enables complex economic calculation and comparison.
Enabling Economic Calculation¶
The unit of account function allows businesses to:
- Compare costs and revenues across different inputs and outputs
- Calculate profit and loss with precision
- Plan long-term investments by projecting future values
- Maintain accounting records that aggregate diverse transactions
- Assess relative efficiency of different production methods
Without a stable unit of account, businesses cannot determine whether they are creating or destroying wealth. Economic rationality becomes impossible.
The Importance of Stability¶
For money to function effectively as a unit of account, its value must remain relatively stable. Rapid inflation distorts economic calculation by making historical prices meaningless and future planning speculative.
When fiat currency loses value unpredictably, businesses must constantly adjust prices, renegotiate contracts, and hedge currency risk. This uncertainty adds friction to all economic activity and misallocates resources toward inflation protection rather than productive investment.
Connection to Other Functions¶
The unit of account function reinforces money's role as a store of value. If money cannot reliably store value across time, its utility as an accounting measure deteriorates. Historical financial records become incomparable as the measuring stick itself changes length.
Similarly, widespread acceptance as a medium of exchange typically correlates with adoption as a unit of account. The same money used for transactions naturally becomes the standard for pricing and accounting.