Definition of Currency Value
By Melissa Warner,
Currency--another word for money--is what makes the world go round. The names of the actual denominations of currency, as well as the materials they are made of and their value, vary from country to country.
Although you can use your own currency when you travel to some countries, in most cases you will be required to exchange your own currency for that of the country in which you are traveling
Currency value can be defined in two parts: Currency is a medium of exchange and also something that circulates. Value is how much an item or service is worth from a material aspect, meaning how much it is worth in commerce or trade.
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Most countries use metal and paper for their currency, but in certain parts of the world you may encounter cardboard. Coins are generally circular in shape and are made from metal. Small amounts of money--such as one cent, one pence, one pound, and so on--generally are found in the form of metal coins. Paper currency tends to be used for higher amounts like 100 dollars or 50 Euros. This differs from country to country.
Because currency is generally different from country to country, you usually must convert or exchange currency when you travel. This means if you are traveling from America to England you must exchange your American dollars for British pounds. If you are interested in the rate of exchange, you can use an online tool to convert numeric amounts.
Foreign Currency Market
The exchange rate for currencies is set daily by the Foreign Currency Market. The Foreign Currency Market is a virtual community connected by fax machines, computers and telephones. Every country is involved with The Foreign Currency Market, and offices are found in large international banks in every country and at some large corporations.
Metal money was seen for the first time in 1000 B.C.E. in China. The coins imitated cowry shells, and had holes in them so they could be strung on a cord. This was a huge advance, since previously people would barter or trade with each other to receive the things they needed. In 500 B.C.E. the first silver metal coins were made. . LINK
What Decides the Value of Money By Calla Hummel
Most money used in the 21st has no inherent value. Gold and silver standards used to give money a value in precious metals, and through the Bretton Woods system in the 20th century, most currencies had a set value in dollars, which were convertible to gold. Since the U.S. abandoned the gold standard in 1971, most currencies have had floating exchange rates, which means that millions of buyers and sellers acting through financial markets decide the value of a given currency.
Most money used in the 21st century has no inherent value -- it is just pieces of paper, pieces of metal or numbers on a screen. Dollars, euros, yen and hundreds of other currencies can be used in economic transactions simply because people have confidence in the issuing government and believe that one dollar or one pound will buy the same goods tomorrow or next month as it can today.
Gold and Silver Standards
Until World War I, most industrialized nations used a gold or silver standard (many, including the U.S., used it well into the 20th century, however). This meant that an issuing government promised that it had the equivalent value in gold or silver in its reserves as the total value of its currency in circulation.
This practice began with gold and silver coins (hence, the coins had inherent worth as gold or silver, not just as the monetary value imprinted on them), and evolved into the standard system after governments began printing paper money to facilitate carrying large amounts of money from one place to another.
Recognizing the need to formally reconstruct the global financial system after two devastating wars and the Great Depression, the Allied nations signed the Bretton Woods agreement in 1944. The agreement set up an international financial framework to manage and regulate financial relations between countries.
One of the major features of Bretton Woods was that it established a fixed exchange rate system (meaning that exchange rates were decided by and between governments), where currencies had a set rate in U.S. dollars and the dollar was backed by gold. Under this system, the value of money could be expressed in gold and government representatives decided how much gold a unit of currency was worth.
Floating Exchange Rates
Floating exchange rates are determined by the aggregate supply and demand of a given currency on international currency markets (in other words, the needs and offers of millions of buyers and sellers around the world decide how much units of currency are worth). Floating exchange rates became the norm after the U.S. abandoned the gold standard in 1971 and Bretton Woods dissolved.
Today, the value of money is influenced by the actions of a number of entities and millions of people. How much one currency is worth in terms of another currency is decided by participants in financial markets, since most currencies have a floating exchange rate.
Investors decide to buy or sell currencies at a given rate based on economic and political developments, and business people and tourists based on their needs, which are also affected by such developments. Hence, while few governments set exchange rates, they can influence the exchange rate through monetary policy or political decisions. LINK
How Does Currency Value Go Up and Down? By Gregory Hamel
Fluctuations Based on Supply and Inflation
One factor that affects how a given currency's value goes up or down, is the amount of a given currency in circulation, and relative inflation. For instance, if a country begins printing money, the value of a currency is diluted due to inflation, so its value will fall relative to other world currencies. If a large amount of the money supply were somehow burned up, it would have the reverse effect.
Value Changes Based on Demand
Like all markets, currency is affected by both its supply and demand. The desirability, or demand for a given currency also results in changes to its value. The more foreign countries want to hold a certain currency, the more it is worth, and the less they want it, the less it is worth. There are many factors that affect demand for a currency, such as interest rates between countries, political factors, expectations and trade balance.
For instance, if you knew a certain country was going to enter a costly war, which might result in the collapse of its government, you would probably want to get rid of any currency you had from that country, and the value of its currency would consequently fall. In general, live exchange rates are a reflection of one currency's desirability versus another at a given point in time.
About Purchasing Power
In a perfect market, the purchasing power of one currency would be the same as another currency. That is, a consumer should be able to purchase the same bundle of goods in one country, that she would be able to by exchanging her money and buying it in another country.
This ideal of exchange rates rarely holds true however, for many reasons, such as trade barriers, imperfect competition and prices that do not immediately adjust to reflect a change in a currency's value.
This is why traveling to certain countries can seem very cheap, while others can seem expensive. When a currency has greater purchasing power relative to another, that currency is said to be undervalued, while a currency with less purchasing power is said to be overvalued.
For instance, if someone buys a hamburger in the United States for $2, and hamburgers in Britain cost 2 pounds, but the person in the United States can only get 1/2 a pound for every dollar, British pounds are overvalued because he can't buy as many hamburgers with pounds in Britain as he can with dollars in the United States. LINK
How Does the Value of Currency Get Determined? By Edwin Thomas
All modern monetary systems are based on the principle of fiat currency. This means that the value of money is derived not from any intrinsic value (as if it were made from precious metals) or the promise to redeem them for a set amount of precious metals but because the government dictates that it must be accepted as currency. The value of money is set by a mixture of what the government says it should be and what private and public speculators say it should be.
The government issuing flat currency takes the primary responsibility in setting its value. When a government prints fiat money, it is acting as a creditor in the sense that it promises the money is worth something. If a government does not back the value of its currency through an appropriate level of taxation, the money loses value.
This is why budget deficits, national debts and central bank interest rates have an impact on what a currency is worth. Strong backing on the part of the public, strong economic performance and a healthy private banking sector can all mitigate this, however.
In the modern world economy, currency itself is treated as an investment commodity. The result is a speculative market where investors migrate between currencies seeking the convert capital into the best haven for their investment. This can cause a nasty feedback loop.
A government with a weak economy, weak banking system or high budget deficits (or any of the above factors) will see the value of its currency erode vis-a-vis other currencies. This will cause money speculators to bet against it, driving it further down. The example of the sharp decline in the value of the dollar in 2007 and 2008 were good examples.
Market speculation compounded the triple problems of weak economic performance, banking sector scandals and high budget deficits to produce a worldwide crisis in confidence against the U.S. dollar, driving it to records lows against most other major world currencies. This reflected the flight of private investors and foreign treasuries away from the dollar as the currency of choice.
What Gives a Currency Value By Jeannie Knudson,
In the world market, most currency has no fixed worth, resulting in value fluctuations. In many countries, the currency system is based on the government's assurance that the currency has value and the people's belief that the currency will be worth something when they go to spend it.
The value of early coins depended on the type of metal they were made of and how much metal they contained. Until the 1970s, U.S. currency was tied directly to the value of and backed by gold. The U.S. stopped using the "gold standard" when demand for gold exceeded the supply.
The fiat, or government-backed money system, replaced the gold standard in the U.S. and many other countries. While fiat money itself has no fixed worth, its value is backed by a government's promise that it is legal tender and therefore has value based on that country's economy and government.
Inflation rates and anticipated economic stability are factors determining the value of a country's currency in the world market. Taxation, deficits, purchasing power, currency reserves, employment statistics and interest rates all contribute to a particular currency's buying power and therefore its worth. LINK