Unit of Account

Imagine a market where every item is priced in terms of every other item: a loaf of bread costs three eggs, a shirt costs twelve loaves, and so on. With hundreds of goods, comparing prices would be almost impossible. A unit of account solves this by giving everything a price in the same unit, such as dollars, euros or rupees.

Because everything is measured in one unit, people can compare a phone priced at 600 with a holiday priced at 1,200 and see instantly that the holiday costs twice as much. Businesses can add up costs, revenues and profits, and governments can measure the size of the economy.

A good unit of account needs to be stable. When inflation is very high, prices change so quickly that the unit stops being a reliable measuring stick, and people may start quoting prices in a more stable foreign currency instead.

The unit of account is not always the same as the money used to pay. In some countries, rents or contracts are priced in a foreign currency but paid in the local one at the day's exchange rate.