Unit of account

Also called: Common standard measure of value, measure of value, common denomination · Topic: Money: From Barter to Digital Currency · NCERT: Class 7, Ch 11 "From Barter to Money"; Class 12, Ch 3 "Money and Banking"

Meaning

Unit of account is the function of money in which the value of every good and service is stated in the same money unit (in India, the rupee). Because all prices use one common scale, we can compare any two goods and work out their relative price, meaning the price of one good measured in units of another.

• Formula: relative price of good A in terms of good B = Price of A ÷ Price of B.
• Why it matters: it is one of the two primary functions of money in NCERT (Class 12, Money and Banking). Without it, buyers and sellers would need a separate exchange rate for every pair of goods. With it, one price per good is enough.
• NCERT also calls it the common denomination or measure of value.

Explanation

How it works: one scale for everything

• Under barter (swapping one good directly for another, with no money):
• Every good has to be valued against every other good.

• How many shoes equal one bag of wheat? How much wheat equals one goat? Each pair needs its own rate.

• With money as a unit of account:

• Each good gets one price in rupees.

• Any comparison is then a simple division.

• RBI's description: money is used "to value goods or services and express it in monetary terms" [2].

• Worked example (Class 12):
• Pen = ₹10, pencil = ₹2.
• Relative price of pen in terms of pencils = 10 ÷ 2 = 5, so 1 pen = 5 pencils.
• Going the other way, 1 pencil = 2 ÷ 10 = 1/5 of a pen.

How much it saves: fewer prices to track

• Number of exchange rates needed without a common unit = n × (n − 1) ÷ 2, where n is the number of goods.
• Example with 100 goods (a derived illustration):
• Without money: 100 × 99 ÷ 2 = 4,950 exchange rates.

• With money as the unit of account: only 100 prices.

• Result: comparing, bargaining, keeping accounts and making plans all become simple. Firms can add up costs, revenue and profit. Governments can add up tax and spending. All of this is possible only because everything is counted in the same unit.

Link to purchasing power

• Purchasing power of money means the amount of goods that one unit of money can buy.
• Formula: Value of money = 1 / Price.

• In the pen–pencil example, ₹1 buys 1 ÷ 2 = 0.5 pencil, or 1 ÷ 10 = 0.1 pen.

• A unit of account works like a ruler. It is useful only if the ruler does not keep shrinking.

• The price index rises from 100 to 125, so prices go up 25%.
• The value of money falls from 1/100 to 1/125, which is a 20% fall (not 25%).
• The same rupee now measures a smaller amount of goods.

What weakens it: inflation and hyperinflation

• Inflation means a continuing rise in the general price level.
• Moderate inflation hits the secondary functions first: store of value and standard of deferred payment. The unit of account still works, but it becomes less reliable for comparisons over time.
• Hyperinflation means extremely fast price rise, where prices can double within weeks or days.
• The rupee-type local unit stops being a stable measure.
• People start stating prices in a foreign currency, such as the US dollar.
• At that point the unit of account function fails, together with the medium of exchange.
• Examples beyond NCERT: Weimar Germany (1923), Zimbabwe (2008), Venezuela (late 2010s).

In India

• The rupee is India's unit of account. Shop prices, wages, loans, EMIs, taxes and budgets are all stated in rupees.
• Digital rupee (e₹): RBI defines CBDC (Central Bank Digital Currency) as "the legal tender issued by a central bank in a digital form" [2][3].
• Legal tender means money that people must, by law, accept when a debt is being paid.
• The e₹ is exchangeable at par with paper currency, so ₹1 in e₹ = ₹1 in notes [2]. So the unit of account does not change. Only the form of money changes.

• RBI's Concept Note on CBDC was issued on 7 October 2022 [3].

• Protecting the "ruler": the inflation-targeting framework

• Law: the RBI Act, 1934 was amended in 2016 to create flexible inflation targeting [4]. Under this system RBI aims at a numerical inflation target but can also care about growth in the short run.
• Section 45ZA: the Central Government, in consultation with RBI, sets the target in terms of CPI (Consumer Price Index, which tracks the prices of a fixed basket of goods and services that households buy), once every five years [5].
• Target: 4% CPI inflation, with an upper tolerance level of 6% and a lower tolerance level of 2% [4][6]. It was first notified on 5 August 2016 [4].
• Latest: retained on 25 March 2026 for 1 April 2026 – 31 March 2031 [4].

• Who acts: a six-member Monetary Policy Committee (MPC) sets the policy repo rate (the interest rate at which RBI lends money to banks for a short period) [4].

• Why this matters for the unit of account:

• Stable prices → the rupee measures value in a steady way → people keep pricing, saving and lending in rupees and do not switch to gold or foreign currency.

Don't confuse with

• Medium of exchange: the other primary function. It is about paying, where money is handed over to buy goods. Unit of account is about measuring, where money is used only to state value. A price tag uses money as a unit of account even before any money changes hands.
• Store of value: a secondary function. It carries wealth into the future. Unit of account compares values at one point in time. Moderate inflation damages store of value first. Only hyperinflation breaks the unit of account.
• Standard of deferred payment: a secondary function. It fixes payments to be made later (loans, EMIs, rent) in money terms. Unit of account covers present prices.
• Relative price vs money price: the money price is the price in rupees (pen = ₹10). The relative price is the price in terms of another good (1 pen = 5 pencils). The unit of account is what makes it possible to work out the second from the first.

Prelims Hooks

• NCERT classification: unit of account and medium of exchange are the primary functions. Store of value and standard of deferred payment are the secondary functions.
• Trap: RBI's CBDC Concept Note (Oct 2022) counts only three functions of money: medium of exchange, unit of account and store of value [2]. It has no separate "deferred payment" function.
• Relative price of A in terms of B = Price of A ÷ Price of B. Pen ₹10, pencil ₹2 → 1 pen = 5 pencils.
• Other names: "common denomination" and "measure of value" both mean unit of account. They do not mean medium of exchange.
• Hyperinflation breaks even the unit of account, and people start quoting prices in a foreign currency. Moderate inflation first hurts only store of value and deferred payment.
• The e₹ is at par with notes [2], so it does not create a new unit of account.

Mains Points

• Price stability protects money's role as a measuring rod.
• A unit of account that keeps shrinking makes price comparisons, business contracts and national accounts misleading.
• In extreme cases, as in Zimbabwe (2008) and Venezuela (late 2010s), people abandon the local currency as a unit altogether.

• This supports India's legal 4% ± 2% CPI target under the amended RBI Act, which was renewed in 2026 for 2026–31 [4].

• The form of money changes, but the function stays the same.

• From the karshapana to paper notes to UPI and the e₹, the rupee remains the common unit of value.

• The e₹ is designed to complement, not replace cash [2]. It keeps the same unit and only changes the form of payment.

• Flexibility versus credibility (the band debate).

• The 2–6% band lets the MPC handle supply shocks such as food price spikes [5].
• Frequent breaches of the band can reduce trust that the rupee is a steady measure of value. When that trust falls, people look for other units, such as gold, land or foreign currency.

Related concepts

• Money
• Functions of money
• Medium of exchange
• Purchasing power of money
• Store of value
• Standard of deferred payment
• Money's worth

Read more

• What money is and what it does