Just like the value of goods and services, the value of currencies is also determined by the demand of it. Everyone is wondering if money has a certain value and why do dollar bills have different denominations? There are a lot of answers to this questions, but it still depends on how an individual sees it.
As early as the presence of developing societies, there are already different currencies within them. Money itself is worthless based on what it has been used with for the past century. No one can fully understand the present world inflation and the consequences they might lead in, not unless people can comprehend the causes that determine a currency’s purchasing power.
A money’s “equation of exchange”, along with a strict quantity theory, have distorted and denominated the idea of some of the major monetary economists. Currencies were gauged by the gold standard before, comparing currencies to the U.S. dollar and then its value of gold. Now, there have been leading factors that influence the fluctuations in currencies and clarifications behind their value. Here are some.
Supply and Demand
The traditional framework supply and demand let you predict the next movement of a currency. An individual can make expectations regarding the future direction in the exchange rate if he/she understands this framework. The value of the currency will be increased if it has greater demand or velocity. However, it will be depreciated by greater supply.
The model of supply and demand of determining exchange rates is implying that there will be changes in the equilibrium exchange rate if supply conditions and factors that influence the demand alters. The demand for a currency shows the number of times a certain country’s legal tender circulate within a given period of time. A good example is a buyer staying in the demand curve if they want purchase dollars and tag along with the supply curve if they want to sell them.
If the price of a product rises, it is indicating that there is an underlying demand for that product. Even if higher prices don’t look good to a consumer, it is still considered healthy for a country to have a moderate growth in inflation. The faster a currency circulates within the market, the more it is perceived to be valuable.
One of the most important factors is the balance of trade and investment. This is determined by the space between imports and exports for a country. The terms of trade will be improved if the exports of a country rise greater than its imports. This will result in higher revenue, which causes a greater demand and value for the country’s currency.
Exchange of Currencies
The “floating currency exchange” became the official standard for determining the value of a currency right after the gold standard fell. It gives a relative measure for understanding the currency’s value by comparing it to other country’s currency. Every other day, a certain currency can be more or less valuable than the day before. The most-watched exchange rates are carefully analyzed for economic measure purposes.