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What is a unit of account in economics?
What is a unit of account function of money?
Why is a unit of account important?
What are the functions of money?
Nov 21, 2023 · Money as a unit of account means that money is divisible, countable, and fungible. Money is divisible because it can be subdivided into smaller units. It is countable because...
- 5 min
- What is an example of unit of account?Money is an example of a unit of account. Money is divisible into smaller units; it is countable so that values can be totaled; and lastly, money i...
- What is meant by a unit of account?A unit of account is something that is divisible, fungible, and countable. Divisible means that each unit of account can be subdivided into smaller...
- What can be used as a unit of account?Anything can be used as a unit of account if it is fungible, countable, and divisible. Money is a common example of a unit of account. Other units...
- Overview
- Lesson summary
- Key Takeaway: the three functions of money
- A Medium of exchange.
- A Store of value.
- A Unit of account.
- Common misperceptions
- Questions
In this lesson summary review and remind yourself of the key terms and calculations related to the definition, measurement, and functions of money. Topics include the monetary base, M1, M2, and the functions of money.
•a medium of exchange
•a store of value
•a unit of account
Defining money is almost as tricky as defining love. It's something we use every day, but most people don't stop to think about what money is. Money is hard for most people to describe because, at its core, money is an idea. Conceptually, anything is considered money if it functions as:
1) a medium of exchange,
2) a store of value, and
3) a unit of account.
Money is just one of many types of assets. What makes money different from other assets is its ability to do more than just store value. Most importantly, for an asset to be considered money, it must be accepted as a form of payment.
Interestingly, almost anything can be money as long as it can act as:
•a medium of exchange
•a store of value
The most important function of money is its use as a way of buying things, in other words, as a medium of exchange. If your grandmother sends you $20 tucked in a birthday card, you can take that and buy whatever you want with that money. Well, up to $20 worth of whatever you want. Thanks, Grammie!
What if you have money, but don’t know what you want to spend it on yet? But, suppose you had no idea what you wanted? You save that $20 in your room and spend another day. That is money acting as a store of value. If money fails as a store of value, it will also fail as a medium of exchange. If money didn’t keep its value for later, you would have to spend it immediately on something before it became worthless. That’s pretty impractical!
[Can you give me another example?]
This function makes transactions easier to carry out because it means money can give a specific value to something.
Suppose there are three people with goods to trade. Caleb wants to sell a snake habitat in exchange for three pizzas, Cadell wants to sell a pizza in exchange for two movie tickets, and Caprice wants to sell four movie tickets in exchange for two snake habitats. Trying to untangle these exchange prices would cause quite a headache. Instead, it's much easier to value these goods using a single, common currency.
[Can you give me another example?]
Key Equations
•Monetary aggregates might be easy to confuse with each other. An easy way to remember them is that the higher the number on the aggregate is, the less liquid that kind of money is. M2 is less liquid than M1.
•It might be confusing that checking accounts are considered narrow money, but savings accounts are considered near money. The reason for this is that savings accounts tend to have some limitations on them that checking accounts usually do not. Most checking accounts are demand deposit. Savings accounts frequently will have limitations such as being only able to make five withdrawals per month or having to wait ten days after you deposit money to get them.
•You might see a reference to an even broader monetary aggregate in your textbook or class and be confused why it isn't here. The monetary aggregate M3 is tracked in some countries, but not others (the U.S. stopped tracking this category in 2006). If you see M3 elsewhere, the most important thing to remember about it is that M3 is less liquid than M2. In fact, you might even see a broader category called L, which is even less liquid than M3.
•Are cryptocurrencies money? There is actually some debate about whether cryptocurrencies (such as bitcoin) are money or just a financial asset. In fact, central banks around the world are grappling with this question right now, and there isn’t any consensus on this issue. A main sticking point to argue that cryptocurrencies aren’t money is that they generally cannot be used as legal tender (in other words, to buy stuff). Not a lot of stores are equipped to take cryptocurrencies to buy goods and services, at least not yet. As of right now, cryptocurrencies aren’t included in either the narrow or broad definition of the money supply.
•Describe what function money is fulfilling in each of these situations
(i) Chey puts off spending the $12 she received for her allowance until next week. (ii) For every chore he completes, Owen earns $1 . (iii) Penny uses the $20 she got for her birthday to buy a book on astronomy cards.
[I think I have the solution. Can I check my work?]
•The nation of Jacksonia uses the Jacksonian Yen as its currency. Their currency is fiat money that is not commodity-backed. The table below describes all of the assets that exist with Jacksonia
(i) Calculate MB in this economy
Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment.
In economics, unit of account is one of the functions of money. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation ...
Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to buy goods and services today and pay in the future. Thus, money serves all of these functions— it is a medium of exchange, store of value, unit of account, and standard of deferred payment.
How Unit of Account feature contributes to the Functions of Money. The Unit of Account feature of money underpins many of its other essential functions. By providing a standardised measure or metric of market value, it facilitates transactions, promotes exchange and encourages economic activity.
Mar 22, 2024 · A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. It is one of the three functions of money, alongside being a medium of exchange and a store of value.
