Unit of account
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In economics, the unit of account is a unit of measurement of market value. Goods for sale in a market are priced using a unit of account. In this manner the value is measured by the seller and expressed to the buyer.
Contracts of credit or debt are denominated in a unit of account. In this manner the agreed value of the debt is measured, and the method of settling the debt is defined.
Whilst all market participants are free to use any unit of account that they prefer, most markets have only a few widely accepted units of account. For example in Japan the most universal unit of account is the yen.
Historically the unit of account function has been served by one of the following:
Some examples from history include:
- barrels of rum
- a fixed weight of salt
- packets of cigarettes
- a fixed weight of gold
- a quantity of paper notes (eg dollar bills)
- cows
It is generally assumed that a good unit of account is one that is stable. Just as a measuring stick used to measure length should itself be stable in length so to a unit of account used to measure value should itself be stable in value. However there are schools of economic thought that challenge this view point.
While it is most common to think of accounts in currency, it is possible to hold accounts in gold (as e-gold does) or options in various other commodities.
Value is ultimately a subjective quality so the value that a unit of account measures is in practice a market value. The point at which multiple subjective view points converge for the purposes of a free exchange of goods.
Inflation and deflation are the rise and fall, respectively, in the value of the unit of account.
Selecting the Unit of Account
An accepted unit of account can emerge freely from natural market dynamics and cultural forces (as gold historically did) or else it can be imposed through legal tender laws (as most modern units of account are).
A first step to identifying any suitable unit of account is to determine what styles of capital are used as factors of production for a given economy. Unless the units really represent an artificial and ultimate form of scarcity, they will not be treasured or sought as much as something else in the economy, and thus, accounts will quickly be depleted to purchase the scarcer good. This disables saving, banking, even central banking, and makes investment very difficult - hoarding all but inevitable.
Miscellaneous
An important difference between units of account and standards of deferred payment is that there are circumstances in which a deferred payment may never be made, e.g. bankruptcy. There are never circumstances in which a unit of account will not be called on, claimed by someone. Accounting depends on - accountability.
By contrast, a poor medium of exchange disables trade, and a poor standard of deferred payment disables bond, debt, loan and mortgage contracts. A poor store of value costs only those who actually purchase and attempt to store it, while a poor unit of account arguably affects absolutely everyone.
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 grids, 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.