Working Papers, Department of Economics, Lund University
Transaction Costs, Money and Units of Account
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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