Today, there are several currencies used all across the world.
Currencies of different countries have different values in comparison to one another.
For instance, (now as of September 2021)....
$1 = ₹73.62
€1 = $1.18
€1 = ₹86.97
£1 = ₹102.00
£1 = $1.39
C$ = ₹58.17
*I was just to mention a few (2-3) but I just can't run out of these Currency Comparisons so I mentioned some more!*
Anyways, so if you are not familiar with other currencies then here are a few mentioned!
Some Country's Currencies & Their Symbols!
Have you ever wanted to know that why do currencies of different countries have different values?
What if someday all currencies became the same in value? What'll happen to our life? What are the changes which we have to face?
Let's find out the answers to some of the most asked questions, today!
Let's see;
What Makes Currencies Weaker &/OR Stronger?
Well, today there are multiple factors which determines the worth/value of a Currency!
Let's understand major one's, today!
So here we began,
Demand & Supply Rule!
This is the major factor affecting the price of something which is not in somebody's hands or we can say is not set. Like— Shares, Currencies, etc.!
Let's see how does the Demand & Supply Rule works?!
When the demand of something is more then the supply of it decreases (it is so because there are more people willing to buy that certain item, whereas the supply of it may not be that high).... Hence, it results in the increase of that certain item's price!
Similarly, if the demand of something decreases, whereas the supply of it is more (that is because nobody is buying it & they are still being manufactured on a regular basis. As nobody's willing to buy those items, they are large in number).... So it'll result in a decrease of that item's price.
So this is how basically Demand & Supply Rule Works!
So it is not very much different of how it works in the Share Market & Currences.
Let's see how do Demand & Supply Rule is a factor of determining a Currency's value/worth.
Well, when the demand of something increases among the people of a country which is originally produced or manufactured by some other country then the Country who'll be manufacturing it will have an increase in its Currency's value.
Let's make it a bit more transparent!
To understand this thing more clearly, first try to understand that :
EXPORT means SELLING to other countries
&
IMPORT means BUYING from other countries.
Just repeat,
EXPORT = SELLING
IMPORT = BUYING
NOW,
Let's take an example to understand what role does the DEMAND & SUPPLY RULE plays in the valuation of a currency.
So India, for example; EXPORTS oil from other countries. Let's say US!
So in India there is a very high demand of crude oil, well india itself produces only 17.9% of the entire crude oil, required/consumption of India, itself. & India imports (buys) the rest of it from countries like— US, Saudi Arabia, etc. (Now, taking US for example).
& you know to buy (import) any sort of goods from some other country then the one buying it (importing it) from that country is supposed to pay in that country's currency.
It'll make more sense in a second.
Well, to buy oil from US, like if India is buying (importing) oil from US then India has to convert "(rupees) INR (₹)" into "(dollars) USD ($)".
So India will take its money &'ll go to a Foreign Exchange & DEMAND for the US Dollars. & then get the US $. & pay USA for the Crude Oil.
Hence, here the demand of $ (US Dollar) increased where as the demand for ₹ (Indian Rupee) decreased because we are ready to give rupees & convert it into US $.
Now remember we are supposed to give ₹73.62 to make 1$.
You know that's how it basically works!
Importing & Exporting!
Well, just a while ago in the last example I mentioned a little bit 'bout what Exporting & Importing means!
& I'll like to inform y'all that, how much a country imports or exports— It does have an impact on their Currency's value/worth!
Let's continue with the last example!
So as I just said that; we pay a country in their own currency when we buy (import) any sort of a good from that particular country.
So here as we know the Demand & Supply Rule is applied!
Ok! Well so now try to understand this Export—Import System.... as it is kind of like countries doing business with one another. All countries are Exporting (selling) & Importing (buying) goods to &/OR from other countries as per their own need. For like within the last example as India paid in US $ from which the demand of the US $ increases & so does its value.
& that was all because, USA PRODUCED enough oil to EXPORT (SELL) it to India & get paid in return & their Currency's value increased only because of that.
So with this EXPORT & IMPORT thing, what I mean is that the Currency's Value(s) also depends on the things one produces/manufactures because as many things one produces/manufactures, as much they can export, & as much profit one's country'll make. & It is also very good for a country's economy!
Speculation!
Another major reason for the continuos value change in a specific country's currency is the Forex Market/Currencies Market.
Forex Market is basically a place where people exchange different kinds of currencies. You know, As in Share Market people exchange shares of companies.... similarly, in the Forex Market people Exchange Currencies. So people from all around the world are basically investing in currencies.
Ok! Well, this now within itself is a very huge topic to be discussed. So I'll soon write a whole entire article based on Forex Market. So STAY TUNED, Y'ALL!
Anyways, basically investors kind of invests in a certain currency only if they feel like it'll rise in future & therefore it results in the rise of that certain Currency's price/value!
& if nobody have invested in one currency then it'll go down.
Again! Here it is kind of like the demand & supply rule only!
High Demand = High Value
Low Demand = Low Value
Foreign Reserves!
Well, what I mean by foreign reserves is that what is the thing every country'll require. Let's take an example - Oil!
So now have a look at Kuwati Dinar. It is the most expensive currency in the world!
It produces & exports (sells/sends) oil & other countries imports (buys) & pays in their currency (Kuwati Dinar)!
Moreover, Kuwait is well known b'coz of its oil rich country's economic stability.
So the Kuwati Dinar having the highest value is quite obvious!
Currently the most traded currency is US $.
Look the main commodities.... like— gold, oil, etc. are exported from Saudi Arabia & the other countries & who'll import it will have to pay in US $.
But, Why?
Well, because there is a deal.
You might have heard about Return Dollar Deal! — It basically is a deal made between Saudi Arabia & the US; that everytime Saudi Arabia will Export oil to other countries; the other countries must pay in US $ & in exchange of it the US will provide protection to Saudi Arabia's Oil Reserves!
So no doubt that this is also something which have made US $, powerful.
But it is just not it....
There still are many factors that matter for the valuation of a currency, such as:
Economy
USA have the strongest Economy in the world.
Inflation
If inflation is high the value of every penny will decrease over time.
So if inflation is unstable in a country or if Inflation is high then that Currency's value may be affected negatively.
This'll make some more sense within a while.
Other Countries Performance(s)!
If other countries are performing better than one. Like— Exporting/Manufacturing a lot of goods.
& giving investors high returns will make more investors invest in that particular country(s) currency! But investors won't like to invest in such countries with low returns &/OR high Imports than Exports.
However, the way the investors are gonna act is very closely determined with a specific Country's Inflation Rate.
B'coz if the inflation is higher as much as it's interests/returns is, then it's literally 0 profit & a waste of time.
Let's make it a bit more transparent!
Let's say that if you invest in a currency & the country is good enough that the Currency's Value will increase by 4%/year.... Hence, the interest/the return the investor will get is 4% per year.
& let's say the inflation rate of that country is 3% per year.
So if you invest in that then after a year; the gain of 4%; whereas due to inflation the value of the money have decreased by 3%. Hence, the real profit you've earned is of 1%.
So that is the reason investors checks the inflation rate of a country before investing in their currency!
& NOW for real there are still many more factors which affects a Currency's Value.... Like— GDP, Future Plans Of A Country, Unemployment, etc. etc.!
Well, in short the Currency's Value is determined in a quite similar manner like Shares/Stocks Value's/Price's are determined!
Also Read: What Makes Shares/Stocks Prices/Value To Fluctuate/Change Over Time? Who Decides The Price/Value Of Shares/Stocks?
What If All Currencies Became Equal? Moreover, What If $1 = ₹1?
Just imagine one day you wake up & all Currencies are equal in value!
So which means that you literally can explore the world without spending a lot of money.... you know you can do an entire world tour just for like thousand(s) of ₹/$/¥/€/£.
Russia, Japan, USA, China.... you can literally visit any country!
How cool?!
Seems so good! Isn't it?
Everythings cost will be very less!
Let's dig a bit deeper now....
So, IF $1 = ₹1 ; THEN;
First understand that there are many international IT sectors in India which provides jobs to Indians.... & the reason those IT sectors are in India is because they find cheap labour here. But if 1$=1₹, then they'll have to pay the same amount they are supposed to pay in their own country. So this doesn't seems profitable for them in any manner. So therefore, they'll shut down there sectors here in India &'ll return to thier own country. & as I said they provide employment to many.... So If they shut down there sectors, then they'll leave many people unemployed here. & it may also result in an Economic Crisis.
& also there may be an impact on the prices of goods they may decrease or increase, accordingly. B'coz only numbers are changing; value is the same!
& I think that there's one more thing to be added in this entire scenario which is that our salaries are not going to be same as they are today.
You know they may decrease. B'coz 40,000 will be a lot then!
&/OR either inflation will take over (should be there!) or else the value of ₹ (rupees) will automatically decrease.
I said the 'Inflation thing' coz you know if there is more money printed (already) & if it's actually more then required for the country then the rs. ₹ value will automatically decrease.
[I Don't Know If It Makes Sense To You. But That's Just What Made Sense To Me.] (But you don't have to really listen to me. I really don't know if it'll happen or not!)
Anyways!
So is having a Currency of less value good for the country?
Let's find out!
Is Having A Currency Of Less Value, Good?
Well, there is no specified answer for this.
Some would say 'Yes', while some won't!
Well, it depends on the type of Country; like— whether if they are Export Oriented Countries/Export Driven Economies OR Import Oriented Countries/Import Driven Economies!?
Export Oriented Countries/Export Driven Economies basically are such Countries which Exports/manufactures &/OR sells/sends/transports goods in large quantities to other countries.
&
Import Oriented Countries/Import Driven Economies on the other hand basically are such Countries which do not produces/manufactures enough instead they buy/imports goods from foreign countries as per their own need.
So what does this have to do with Countries willing to make their Currencies Stronger OR Weaker?
Well, the Export Oriented Countries/Export Driven Economies.... wants their Currency's value to be less in value.
Why?
B'coz as I said they are such countries which manufactures a lot of goods & exports a lot, right?
So other countries which are buying/importing goods from that particular country will get to buy goods in cheaper rates & if they'll get the goods in cheaper rates than for sure all countries will prefer buying goods from that particular country, ins't it?
So this is the basic reason of why Export Oriented Countries/ Export Driven Economies wants there Currency's value to be less/low in value.
Whereas, the Import Oriented Countries/Import Driven Economies, on the other hand; wants their Currency's value to be stronger or more in value.
B'coz as I said that they buy more from other countries.... So if the value of their Currency will be stronger then the others then they can buy the goods at cheaper rates. Which is profitable for them!
& that's how Countries works!
Exchange Rates & It's Types!
The Conversion rate between currencies is known as Exchange Rate.
(It might not make sense to you right now. But I'm just trying to give you knowledge about some basic things you should know about.
So pay attention. Everything'll make sense!)
Well, now there are mainly 2 types of Exchange Rates:
- Floating/Flexible Exchange Rate
Fixed Exchange Rate is basically that a Country's government have fixed it's Currency's Value.
Floating/Flexible Exchange Rate is basically when certain factors determine a Currency's Value & that Currency's value is always floating; which means that this is not set. (Almost all Currencies works like this, today!)
Depreciation & Devaluation! (Meaning & Difference!)
When the value of a Currency (in Floating/Flexible Exchange Rate) is not set & is decreased b'coz of those certain factors which determine its value, then it is known as Depreciation!
&
When the value of the Currency is decreased by Government itself (in Fixed Exchange Rate) for any reason then it's is known as Devaluation!
& That's the Difference!
They are not very different but they are not same at all!
So this was all BASICALLY about what can really affect a certain Currency's value. & Soem Extra Knowledge!
There might be more!
Feel free to let me know if I didn't mentioned something!
& I also would like to make it clear that no information provided here is 100% accurate!
LEAVE A COMMENT & feel free to recommend me some more topics you want me to write blogs/articles on!
Thanks For Reading!
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