The Economics of the Unit of Account

Abstract

It is time now to examine the unit of account (UA) in more detail. We are concerned here with three principal issues. The first is the nature and uses of a unit of account. The UA is a unit of that commodity or asset — the medium of account (MOA) — in terms of whose units ‘prices are quoted and accounts are kept’ (Niehans, 1978, 118). The UA is that to which the numbers refer in price tags. The medium of account has a name — the dollar, the pound, or whatever — and refers to a specific commodity or asset, but prices are actually expressed in terms of dollar-units. The MOA is the dollar (or pound, or whatever), but the UA is the dollar-unit. This distinction is important because what matters is not so much the choice of unit per se, but the choice of whatever it is whose units are used to express prices. To illustrate, it is hard to believe that there would have been any significant economic effects if the USA had adopted the cent-unit as its unit of account instead of the dollar-unit. All nominal values would have been 100 times greater than they now are, but real values and economic outcomes would have been much the same. However, the monetary history of the USA would have been very different indeed had the USA adopted the pound sterling as it’s MOA instead of the dollar — American inflation would have been determined by the policy of the Bank of England, and so on. It is the choice of MOA that matters, and not the choice of UA as such.

An earlier version of some of the material in this chapter appeared (under David Greenaway’s name as well as mine) in the article ‘Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimal Currency Areas’, Economic Journal 103 (420) (September 1993), pp. 1180–1189.