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December 13, 2017 

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BANK BALANCE SHEET: A record of the assets, liabilities, and net worth of a bank at a given point in time. Assets are what a bank owns. Liabilities are what a bank owes. Net worth is the difference between the two and what is claimed by or owed to the owners of the bank. By definition, a balance sheet must balance. The assets on one side are equal to the liabilities and net worth on the other.

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UNIT OF ACCOUNT:

The money function in which money is used as the common benchmark to designate the prices of goods exchanged throughout the economy. Unit of account, or measure of value, means money is functioning as the measuring unit for prices. In other words, prices of goods are stated in terms of the monetary unit. This is one of four basic functions of money. The other three are medium of exchange, store of value, and standard of deferred payment.
Money is used as the common denominator of prices. Stating prices in terms of the standard monetary unit used as the medium of exchange is not absolutely necessary, but it does make a great deal of sense. Because money is traded for a good, it seems reasonable to state price in terms of how much money is needed to complete the exchange.

If someone is heading off to buy sandwiches or sundials, then the prices are most likely stated in terms of the medium of exchange. If the economy uses U.S. dollars, then sandwiches carry a U.S. dollar price. If the economy uses Japanense yen, then the price of sundials is in terms of yen--Japanense yen.

The reason is that sellers are willing to trade for, and buyers are willing to give up, THE medium of exchange--money--when undertaking this exchange. That is why money is THE medium of exchange. It is used for exchanges.

Noting Prices

Consider the examples offered by three representative citizens of the hypothetical community of Shady Valley.
  • Johnathan McJohnson is a typical suburban consumer. Each month he and his family buy a wide range of goods and services used to provide satisfaction and to enhance their living standards. One such purchase is electricity used to operate his 52-inch plasma screen television, his central air conditioning system, and his electric weed whacker and grass trimmer. The price of the electricity that he buys is $1 per kilowatt hour.

  • Manny Mustard operates a popular restaurant near the Shady Valley Sprawling Hills Shopping Mall, which serves the popular Deluxe Club Sandwich to lunch hungry patrons. To prepare this product, Manny purchases an assortment of inputs--including bread, lettuce, tomatoes, bacon, ham, turkey, and barbecue sauce--from Freshable Produce, a local grocery wholesale distributer. The price Manny pays for a crate of tomatoes is $10.

  • Winston Smythe Kennsington III is a wealthy industrialist and financier who suspects that his sister, Geraldine Constance Kennsington, is secretly seeking to undermine his leadership of OmniConglomerate, Inc. To ward off such an effort, he has hired the services of Seth Mullholland, a former covert military operative, to acquire unflattering and possibly incriminating information on his sister, which he hopes will convince Geraldine to discontinue her efforts. The price that Winston is charged for Seth's services is $10,000 (in small denomination, unmarked bills).
In each example, the price of the good or services is stated in terms of dollars, which is the medium of exchange and the monetary unit for the Shady Valley economy.

Many Possible Prices

The prices of these goods and services, as well as others, need not be stated in terms of the standard monetary unit (dollars). Prices could be stated in terms of a foreign currency. For example, Seth's services might be priced in terms of British pounds or Swiss francs, which might make sense of Seth is a man of international intrigue.

Alternatively, prices might be stated in terms of a physical unit or activity. The price of a Deluxe Club Sandwich, for example, could be stated in terms of the amount of labor required to generate the income needed to make purchase, such as a half an hour working at the minimum wage.

While the prices of some goods and services are occasionally stated in units other than the medium of exchange, this is usually designed merely to highlight some aspect of the exchange. For example, the purchase price of a car might be stated in terms of the number of months an average person needs to work generate the necessary income. This emphasizes the relative effort involved in making this acquisition compared to some other good.

Such alternative prices can be informative, but when push comes to shove, when the nitty meets the gritty, and when exchanges take place, prices end up stated in the monetary unit.

A Bit About Value

Using money as the unit of account for prices also provides a measure of value--how much value buyers and sellers place on a good. If a Deluxe Club Sandwich carries a $5 price, while a Live Headless Squirrels music CD sells for $10 each, then a relative a measure of each commodity can be had.

Buyers place twice the value on the Live Headless Squirrels music CD than on the Deluxe Club Sandwich. Buyers are willing to give up twice as much money to buy a Live Headless Squirrels music CD as to acquire a Deluxe Club Sandwich. Sellers incur twice the opportunity cost of producing a Live Headless Squirrels music CD as the cost of producing a Deluxe Club Sandwich.

This is the reason that money functions as a measure of value. Because money is commonly accepted in payment for all goods and services, because money is the universal medium of exchange, prices provide a relative comparison of value.

The Other Three Functions

The measure of value function is one of four money functions. Three other functions are also worth noting.
  • Medium of Exchange: This function means that money is accepted throughout the economy as payment for goods and services. Buyers acquire goods by giving up money. Sellers receive money when parting with their goods. This is, without question, the most important function of money. This is the function that makes money MONEY.

  • Store of Value: This function means that money can be used to purchase the same quantity of goods and services, that provide the same consumption value, in the future as it can purchase today. Inflation is the primary nemesis for the ability of money to store value.

  • Standard of Deferred Payment: This function means that money is used to designate future payments, such as those for loan repayments. The standard of deferred payment is a natural result of the standard unit of account and store of value functions of money.

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Recommended Citation:

UNIT OF ACCOUNT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: December 13, 2017].


Check Out These Related Terms...

     | money functions | medium of exchange | store of value | standard of deferred payment | value in use | value in exchange | commodity money | fiat money | money characteristics | M1 |


Or For A Little Background...

     | money | price | market | government functions | value | satisfaction | exchange |


And For Further Study...

     | fractional-reserve banking | banking | money creation | monetary policy | Federal Reserve System | money supply | money supply, aggregate demand determinant | monetary economics | Keynesian economics | aggregate market analysis | inflation | business cycles |


Related Websites (Will Open in New Window)...

     | Federal Reserve System | Federal Reserve Education | U.S. Department of the Treasury |


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