Money as a Unit of Account: Definition, Function & Example

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  • 0:01 Money as a Unit of Account
  • 1:24 Importance
  • 2:14 Example
  • 4:01 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Money is vitally important in our modern economy and serves several important functions. In this lesson, you'll learn about the role of money as a unit of account in the economy, and you'll also have a chance to take a short quiz.

Function of Money as a Unit of Account

Money is a type of asset that people normally use to purchase goods and services in an economy. One of the most important characteristics of money is that it serves as a unit of account. A unit of account is something that can be used to value goods and services, record debts, and make calculations. In other words, it's a measurement for value. A unit of account has three important characteristics relevant to money.

Divisible

A unit of account can be divided so that its component parts will equal the original value. If you divide a dollar into four quarters, the total value of the four quarters still equals a dollar. Likewise, if you cut a bar of gold in half, the two pieces together will equal the same value as the original bar as a whole.

Fungible

One unit is viewed as the same as any other with no change in value. A dollar is the same as any other dollar, and 12 ounces of 24-carat gold is no different than another 12 ounces of 24-carat gold. On the other hand, all real estate is unique, and diamonds vary by color, cut, clarity, and carat.

Countable

A unit of account is also countable and subject to mathematical operations. You can easily add, subtract, divide, and multiply units. This allows people to account for profits, losses, income, expenses, debt, and wealth.

Importance

Why is money as a unit of account important? Pretty much everything in our economy, including its total value, is measured in terms of money. Since everyone views money as valuable, it's an efficient way for sellers to price goods and services and buyers to determine whether the value of the good is worth exchanging for money.

It also allows for extension of credit, which is necessary for large-scale investments that help an economy grow because lenders can keep track of debts and readily calculate interest. Finally, you can keep track of the net worth of individuals, businesses, governments, and the entire economy easily and consistently because everyone is using the same ruler to measure income, expenses, profits, losses, debt, and wealth.

Example

Let's look at how this function of money works. Imagine that you have $1,000 in your checking account when you wake up in the morning. You're in a pretty good mood because it's payday, and you know that your checking account will receive a payment of $2,000 sometime today, raising your account to $3,000.

After dressing and eating breakfast, you leave for work. You stop off at your favorite coffee shop for your morning latte. You're a bit ticked when you notice that the price for your tall latte has increased by $0.25, but you're a java addict and order it anyway. You ask the cashier to break a $20 into a ten dollar bill, a five dollar bill, and five one dollar bills because you need the one dollar bills for the soda machines at work.

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