Unit of account

In economics, the unit of account function is served by some fungible commodity or money or agreement for service or labour or free time/leisure that is used to represent price or funds on account and available upon demand.

While it is most common to think of accounts in currency, it is possible to hold accounts in gold (as e-gold does) or options in various other commodities. It is not necessary that the unit be durable, physically held, or even physically holdable. It is often suggested that the electron might be the ideal unit of account, in an aggregate form such as the kilowatt hour. While it is a poor medium of exchange except on power grids, and a very poor store of value even in a fuel cell, and possibly only a fair standard of deferred payment, it would be very hard to argue that there had been a change in the nature of an electron that rendered it less stable or useful than it was when it was first put upon account.

An important difference between units of account and standards of deferred payment is that there are circumstances in which a deferred payment may never be made, e.g. bankruptcy. There are never circumstances in which a unit of account will not be called on, claimed by someone. Accounting depends on - accountability.

A first step to identifying any suitable unit of account is to determine what styles of capital are used as factors of production for a given economy. Unless the units really represent an artificial and ultimate form of scarcity, they will not be treasured or sought as much as something else in the economy, and thus, accounts will quickly be depleted to purchase the scarcer good. This disables saving, banking, even central banking, and makes investment very difficult - hoarding all but inevitable.

By contrast, a poor medium of exchange disables trade, and a poor standard of deferred payment disables bond, debt, loan and mortgage contracts. A poor store of value costs only those who actually purchase and attempt to store it, while a poor unit of account arguably affects absolutely everyone.

Inflation and/or Deflation is where the value of the primary unit of account changes.