Why Money Needs to Be a Unit of Account: The Function of Money in Economics

What exactly makes money useful beyond just being a medium of exchange? One fundamental answer lies in its role as a unit of account - the measurement system we use to assign and compare monetary values across different goods, services, and assets.

The Core Function: Measurement and Comparison

Consider how we measure physical quantities. We use centimeters to track distance, kilograms for weight, and hours for time. Similarly, a unit of account operates as the numerical framework that lets us measure value. Whether you’re evaluating a car worth $50,000, a house worth $500,000, or comparing the price of apples to oranges, money serves as the common denominator that makes these comparisons possible.

This measurement capability enables critical financial operations. When calculating profits and losses, determining income levels, or performing any mathematical computation involving value, we rely on money functioning as a unit of account. Without this standardized measurement system, trade and economic exchange would become virtually impossible - how could merchants agree on fair prices if they had no common way to express value?

The Link to Fiat Currency and Cryptocurrencies

Historically, fiat currency has served this accounting function for most modern economies. The US dollar, British Pound, and Euro all act as units of account within their respective economies, allowing citizens and businesses to universally understand and compare values.

Today, cryptocurrencies have introduced new dimensions to this concept. Bitcoin, Ethereum, and other digital assets function as alternative units of account within blockchain ecosystems, enabling value measurement and comparison in decentralized financial systems.

The Stability Problem: Why Money Isn’t Always a Perfect Unit of Account

Here’s where theory meets reality: money’s value is inherently unstable. Inflation erodes purchasing power, while deflation creates its own economic distortions. These economic phenomena undermine money’s reliability as a measurement tool.

Imagine if your centimeter measurement changed length every month - sometimes shorter, sometimes longer. How useful would it be for construction? Similarly, when inflation and deflation constantly shift money’s real value, its effectiveness as a unit of account deteriorates.

During high inflation periods, the numerical value assigned to goods becomes misleading. A product that costs $100 today might require $120 next year not because it’s genuinely more valuable, but because the unit of measurement itself has weakened.

Double Meaning: Economic vs. Accounting Perspective

In economics, a unit of account refers to money’s ability to express and measure value across the entire economic system.

In financial accounting, the term takes on a narrower definition - it simply describes the specific monetary unit (the currency) used when recording assets and liabilities in financial statements. An accountant recording transactions in US dollars uses the dollar as their unit of account for reporting purposes.

The Bottom Line

Whether examining money’s function in economic theory or its practical application in accounting systems, the concept of a unit of account proves essential. It transforms abstract value into measurable, comparable, and tradeable quantities - making modern commerce possible.