Unit Of Account: Definition, Examples & Its Huge Flaw (2023)
Level: Beginner
Properly understanding what meant by Unit Of Account might not seem very interesting and to be honest, learning about fundamental economic things rarely is! However today we’re going to explore how the emergence of Bitcoin might one day ignite a paradigm shift in the way we as a species measure value across the world and into the future.
This is the final part of our three part series on the functions of money. Our hope is that this series helps everyone to better understand money at a base level. The other two parts are Store Of Value and Medium Of Exchange.
Contents
What Is A Unit Of Account?
Definition Of Unit Of Account
Functions Of Money
Money As A Unit Of Account
Examples Of Unit Of Account
Is Bitcoin A Unit Of Account?
FAQ
What Is A Unit Of Account?
A unit of account is defined as any standard numerical monetary unit of measurement when valuing a good, service or transaction. For example, we might measure the value of a cup of coffee to be $5 USD. Here the USD is acting as a unit of account to measure the value of the coffee. This is similar to how we use kilometres per hour (km/h) as the unit of measurement to measure the speed of a car to be 5 km/h.
Item Being Measured: Coffee (a good)
Measurement Unit: US Dollar
Value: $5 USD
Definition Of Unit Of Account
When economists define something like the USD as a unit of account, it’s no different to a scientist defining something like the kilogram as a unit of measurement for weight. It’s a standard “unit” that everyone uses to do their calculations with, project things into the future or in economics, do their accounts with.
If a money, such as the USD, is considered a unit of account it means it’s being used as a standard way to measure the value of things like someones net worth, what their tax bill is or how much a house costs. Governments and those studying macroeconomics also use it to compile indexes such as the CPI or GDP.
As you can imagine, when everyone uses the same standard (USD) to measure the value of everything it makes things much simpler. Imagine how hard life would be if you got paid in EUR, purchased things in USD and tracked your net worth in GBP!
Functions Of Money
As a new money like Bitcoin gets adopted by people over the years it goes through three stages, with unit of account being the last stage. Whether or not the money performs well in each stage depends on how well it performs in each of the six key characteristics of money:
Scarcity: Limited in supply relative to other things
Durability: Can be used many times and still function, stands the test of time
Acceptability: Is used and accepted by many other people
Portability: Easily moved across long distances
Divisibility: Easy to divide into smaller units to make trading more practical
Fungibility: One unit is exactly the same as another unit
These characteristics combine to give the three functions of money. Each function is something you’re likely familiar with, even if you haven’t heard of the terms before.
Store Of Value: Good Scarcity and Durability combine to make a money a good store of value. This enables it to be reliably stored and then retrieved over time
Medium Of Exchange: Good Acceptability and Portability combine to make it a useful medium of exchange across space. This enables it to be used for buying and selling goods
Unit Of Account: Good Divisibility and Fungibility combine to make it a good unit of account. This enables it to be used as a measuring tool to value goods, services and transactions
You can choose anything to be “money” like a rock or a cow. Whether or not it’s considered as a good type of money and then valuable depends on how well it hits all the characteristics and functions. This is no different to how a phone that can record 8K video, surf the web on a big screen and stream Spotify makes for a more valuable smartphone than a brick phone from the 1990’s.
Dive Deeper: What Is A Bitcoin Worth? The Perfect Money
Money As A Unit Of Account
When using money as a unit of account it should be easily divisible, fungible and countable. It’s also important that a money have good computability in order to be a good unit of account too. This means it can be easily divided, multiplied, added or subtracted.
Each country will usually use their own government issues fiat currency to measure the value of all their goods, services and transactions. For example, the United States uses the US Dollar to measure its economy over time where as Germany uses the Euro.
The unit of account function of money is also used to:
Measure a country’s GDP, CPI etc
Measure local and world financial markets such as futures, trading or derivatives
Measure and set cash rates for banks as well as interest rates for homes, cars etc
Measure and calculate the net worth of people, business and governments various assets
All these measured things aren’t just done for the present either, they’re constantly compared to historic trends or values from decades, centuries or even millennia ago. These comparisons all use various units of account or compare them to each other by translating between two different units of account like gold and the USD. This is akin to converting miles into kilometres when measuring distances.
Examples Of Unit Of Account
Currently the global reserve currency, and thus the most used money, is the USD. While there’s evidence of its hold weakening, it’s still by far the most widely accepted example of a unit of account. There’s also many other examples of different types both now and over history:
The Swiss Franc: A commonly used unit of account when making historical comparisons as it’s maintained its value well over a long period of time
Gold: Many people still measure the value of things in ounces of gold and it is often used again when doing comparisons of value across long historic periods
Pound Sterling: Throughout most of the 19th century and the first half of the 20th century, the United Kingdom’s pound sterling was the reserve currency for most of the world making it the main unit of account then just like the USD is today
As you can see, the unit of account is used to measure and keep track of things that change or compare two different things to each other. For example you might compare the value of a coffee versus a Coke using USD as the unit of account.
Unfortunately, using fiat currencies like the USD as a unit of account isn’t very useful, even though the entire world uses them every day for this purpose. This is because inflation affects them in unpredictable and often large ways. A can of Coke now might be exactly the same as it was 20 years ago meaning it should technically have the same value of $2 USD assigned to it. But it doesn’t. A $2 USD can of Coke in 2000 now is valued at $3.60 USD.
This sounds obvious, but imagine if 1 km was different now to what it was 20 years ago. It would mess up all our measurements, our tracking, our data, the machines that rely on distance measurements like your car, GPS and so on. It’d be a disaster! But with money… we just accept it as normal for some reason.
Is Bitcoin A Unit Of Account?
A good unit of account requires Divisibility and Fungibility. Bitcoin scores excellently in both of these as 1 BTC can be divided into 100,000,000 units called Satoshi and then combined back into any number again all essentially for free. At the Bitcoin network level every Satoshi (and bitcoin) is also treated as equal meaning it has perfect Fungibility too.
Comparing this to fiat currencies like the US Dollar, it can only be divided up into 100 cents for each dollar. When it comes to Gold, dividing it up takes a lot of time, energy and cost as you have to melt it down or physically break it apart into pieces.
So is Bitcoin a unit of account? Well, yes and no. It has all the characteristics to make it the best unit of account the world has ever seen, especially because it’s also borderless, censorship resistant, permissionless and completely digital in nature. But. It’s still very new by money standards.
Learn More: When Did Bitcoins Start? The Big Bang Of Crypto
Bitcoin has only been around since 2009 so it obviously isn’t as well known and embedded in everyone’s culture compared to something like gold or the Euro. A new money also needs time to proceed through the above stages of money. Currently Bitcoin is still developing and gaining awareness as the best Store Of Value the world’s seen.
After that stage has completed it will begin to be recognised as an excellent and useful Medium Of Exchange and then, finally, be used as a global unit of account. Once it’s achieved this, we’ll finally be able to measure the value of things with a unit that inflates at a precise, predictable rate rather than something that bounces randomly all over the place like fiat currencies do now. Then after around 2140, when the last Bitcoin Halving occurs, it will have no inflation and be even more accurate.
Many refer to using Bitcoin as your official unit of account as being on The Bitcoin Standard. This means you value things in bitcoins (or Satoshis) and calculate all your income, expenses, profits, losses, net worth and so on in the BTC unit.
Hopefully one day all businesses and individuals adopt a Bitcoin Standard so that we can as a species, finally measure value with the accuracy and precision that we already enjoy with things like the metric system.
FAQ
What Does It Mean To Be A Unit Of Account
A unit of account is defined as any standard numerical monetary unit of measurement when valuing a good, service or transaction. For example, if the population of a country prices things like a coffee in EUR or do their accounting in EUR then it would be considered the unit of account.
What Does Unit Of Account Mean In Business?
In business the unit of account is what the company or organisation uses to do its annual reports in. For example they might complete their profit and loss statement or submit their taxes denoted in a specific currency such as USD. A global business might have a different unit of account to the various countries it operates in or maintain multiple different ones for different country branches.
What Does Unit Of Account Cost Mean?
As fiat currencies are constantly changing due to inflation, businesses have to update the various ways they display the value of their goods and services. The unit of account cost, also called menu costs, is how much it costs for the business to process these changes. For example, they might need to pay to reprint a dinner menu with new prices on it.
Unit Of Account Vs Medium Of Exchange
Unit of account is when a money is used to measure the value of goods and services, for example a coffee might be valued at $5 USD. Medium Of Exchange is when people are widely using the money to buy or sell goods and services, for example they may give someone a $5 note to buy the coffee.
Is Money A Unit Of Account?
Yes. As most monies have good divisibility and fungilbility, they make for an excellent unit of account.
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