Numeraire

A numeraire is a unit of exchange, or base value, that everyone agrees to use in a market. It’s a French word that basically means “money,” or “face value.”

Since the U.S. dollar is a strong currency, it’s used internationally as a numeraire in many countries: prices are in terms of U.S. dollars. For instance, oil is usually priced in U.S. dollars on international markets. Other countries with other currencies must then see how their money compares to the U.S. dollar to determine the price of oil, or other goods, in its own currency.

When you were a kid, before you had much money, you might have used a numeraire. Maybe you and your friends agreed to trade things using a trading card as a numeraire. All other units of exchange must bow down to the chosen numeraire, and be converted into the numeraire’s form of currency.