Unit of account
From Wikipedia, the free encyclopedia
A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. It is one of three elements that must be met before something can be considered money.
[edit] Uses
A standard unit of account is used to rank different organizations, activities, and goods and services, using a single standard. In modern economies, money in the form of currency serves the role as a standard unit of account with respect to all market activity. It allows for the price of goods and services to be comparable.
In Accounting, a standard unit of account allows for the ranking of the economic status of different organizations and activities. This serves to allocate scarce resources in a way most beneficial to an economy. The use of a unit of account in financial accounting allows investors to invest capital into those companies that provide the highest rates of return. The use of a unit of account in managerial accounting enables firms able to choose between activities that yield the highest profit.
In Economics, a standard unit of account is used for statistical purposes to describe economic activity. Indexes such as GDP and the CPI are so broad in their scope that compiling them would be impossible without a standard unit of account. After being compiled, these figures are often used to guide governmental policy; especially monetary and fiscal policy.
In calculating the Opportunity Cost of a policy, a standard unit of account allows for the creation of a composite good. A composite good is a theoretical abstraction that represents an aggregation of all other opportunities that are not realized by the first good. It allows an economic decision's benefits to be weighed against the costs of all other possible goods in that society, without having to refer to any directly. Often, this is easily accomplished with money.
