Numeraire Definition and Understanding

Numeraire Definition is a financial term of French origin, which acts as the benchmark in comparing the value of similar products and financial instruments. The word numeraire translates as “money,” “coinage,” or “face value.”

How to Understanding Numeraire?

Numeraire is the economic term that represents a unit in which prices measure. And its usually applies to a single good, which becomes the base value for the entire index or market.

And taking a numeraire or base value allows for comparing the value of goods against one another. In essence, the numeraire acts as the set standard of value across an exchange.

An example of a numeraire arises when we examine how currencies were valued under the Bretton Woods system during the mid-20th century. Also, the U.S. dollar (USD) price at one-thirty-fifth (1/35th) cost an ounce of gold.

All other currencies remain the price as either a multiple or a portion of the dollar. In this condition, the USD acted as the de facto benchmark, or numeraire, because it fixes the gold price.

Also, today, the U.S. dollar remains the numeraire for most product prices. And denominating commodity prices in U.S. dollars standardizes. And the cost as the USD is the world’s most traded and liquid currency.

For example, companies involved in oil transactions can promptly convert payments or receipts since oil denominates in USD.

Also, setting oil prices in USD allows a country to compare the value of oil prices in its currency.

For example, if a country that is a net importer of oil has a weakening currency against the U.S. dollar, it will be paying more for its oil (in local currency terms) than it did in the past.