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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2005:29:
Transaction Costs, Money and Units of Account

Ingemar Bengtsson ()

Abstract: In the paper, an analogy with length measurement is applied in order to explore the nature of the unit for value measurement, i.e. the unit of account. As the meter is defined as the length traveled by light in vacuum during 1/299 792 458 of a second, the unit of account krona is defined as the purchasing power of the medium of exchange krona. However, one should be cautious when drawing conclusions from this analogy. Our unit of account is defined in our medium of exchange, but it is meaningful only because we can observe prices on real goods expressed in it. As it would be pointless to define the meter as the length traveled by light in vacuum during 1/299 792 458 of a second if we could not compare this length with anything else, it would be pointless to define our unit of account in something that is not priced. In the paper it is explained how different payment techniques help to overcome transaction costs in the market. In particular, following Alchian (1977), it is argued that to reap the full benefit from the use of payment techniques, it has to be combined with the use of both a unit of account and specialist middlemen. The use of payment techniques helps to reduce costs due to sequential payment, but to reduce costs due to sequential quality evaluation, you need unit of account as well as reputable middlemen.

Keywords: Medium of Exchange; Money; Payment Techniques; Quantity Theory; Transaction Costs; Unit of Account; (follow links to similar papers)

JEL-Codes: B52; D23; E31; E41; E42; E51; (follow links to similar papers)

27 pages, May 16, 2005

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