A loaf of bread costs 2 euros and a lunch costs 6 euros. What does pricing both in the same unit allow you to do?
Correct answer
Answer D: Compare how much money each option costs.
Quick explanation
Here, money acts as a unit of account. The lunch costs three times as much as the bread. You decide whether it is worth that price to you.
Detailed explanation
Without a common unit of account, the value of each good would have to be expressed in many different exchange ratios: how many loaves of bread is a pair of shoes worth, how many hours of work a bicycle, and how much coffee a repair? With a common monetary unit, each good has a price in the same unit of measurement.
This function makes price comparisons, accounting, contracts and economic planning easier. Businesses can compare costs and revenues, households can draw up budgets, and loan agreements can specify clear amounts. To work in practice, the unit of account must be sufficiently divisible and understandable in everyday life.
A unit of account need not exist as a physical object. Prices can be quoted in euros even if payment is later made in cash, by bank transfer or by card. The unit of account therefore describes the common language of prices, not the particular payment tool.
Example or everyday application
A laptop costs 900 euros, a table 300 euros and a repair 100 euros. Because all prices use the same unit, you can immediately see that the laptop costs three times as much as the table.
Key takeaway
The unit of account is the common language of prices.