DEFINITION of Numeraire
Numeraire is an economic term that represents a unit of account. A numeraire is usually applied to a single good, which becomes the base value for the entire index or market. By having a numeraire, or base value, it allows us to compare the value of goods against each other. In essence, the numeraire acts as a set standard of value across an exchange.
The word numeraire is French, and can translate as "money," "coinage," or "face value."
BREAKING DOWN Numeraire
An example of a numeraire arises when we look at how currencies were valued under the Bretton Woods system during the mid-twentieth century. The U.S. dollar was priced at one-thirty-fifth the price of an ounce of gold. All other currencies were then priced as either a multiple or a fraction of the dollar. In this situation, the U.S. dollar acted as the numeraire because it was fixed to the price of gold.
Today, the U.S. dollar remains the numeraire for most commodity prices. Denominating commodity prices in U.S. dollars gives the price a set standard to work off, and as the U.S. dollar is the most-traded and most liquid currency in the world companies, that engage in oil transactions can easily convert payments or receipts in a timely manner.
Also, by setting oil prices in U.S. dollars, it allows a country to compare the value of oil prices in its own currency. For example, a country that is a net importer of oil and its currency is weakening against the U.S. dollar will be paying more for its oil (in local currency terms) than it did in the past.