For example in Vietnam, lunch can be bought for 50,000 VD and in South Korea, apartments can cost several MILLION Won. Why do some countries use such large denominations?
In: Economics
It is actually the inflation’s side effect.
The money worth less than the paper they paint it on. So, they use a higher number.
You can see how it begins (again) in Turkish Lira. In 2007, Turkey removed 6 zeroes from the money (ie 10 million TLs become 10 TLs). The $/TL was something like 1.20.
Now, $/TL is 8.65. TL loses it’s worth.
To somewhat counter that, countries issue higher bills. So that the minimum wages can keep up against the inflation and people can afford basic stuff like electricity bills and such.
Usually these very large denominations indicate a period of significant inflation in the past. At some point an economic crisis made it necessary for the government to pump out currency to pay off debts or force investment, permanently devaluing the currency.
If you look back through South Korea’s economic history, you can see multiple inflation spikes in the 60’s, 70’s, and 80’s with rates hitting 30-70% – an already weak currency post-Korean War being further devalued.
Vietnam has a similar but more dramatic story: enormous triple digit inflation rates after the Vietnam War.
Sometimes nations do rebalance the devalued currency to reset the values. A few years ago Venezuela scrapped the Bolivar currency and converted it to Bolivar *Fuerte* currency to knock some zeroes off.
Wouldn’t those be examples of *small* units though?
A currency with “large” units would be (for example) Bitcoin, where lunch would cost like 0.0000001 Bitcoin.
Can’t speak for Vietnam but in Korea, units used in money do not reset when going from coin to paper bills. In the US, coins are cents and paper bills are dollars. You have the 1, 5, 10, 25 cents then it transitions to bills where the numbering restarts so that the smallest bill is 1 dollar. In Korea, all currency is called won. Coins go 1, 5, 10, 50, 100, 500 won and bills continue the numbering from there so the smallest bill denomination is 1,000 won and the highest is the 50,000 won.
Inflation. If you look at Zimbabwe’s old currency, there were 100 trillion dollar notes worth almost nothing. I have a few!
I guess you mean small (in terms of comparative value) units of currency. The reason is historical rampant inflation.
These currencies didn’t all start out that way.
For example the Japanese yen started out at parity with the US dollar (they were both copies of Spanish coins).
After going away from backing their currencies with precocious metal and undergoing some inflation and In Japans case losing a world war, a US dollar is now worth more than 100 yen.
Inflation makes a currency unit worth less, but if it isn’t too much or gets caught before it gets much worth it is easier to keep going with the now inflated value than to change things.
Turkey a few years ago did something like that they had had some inflation and now had ridiculously high numbered prices for every day items. They thought they had things under control though and enacted a currency reform that basically took of 6 zeros from everything 1.000.000 old lira became 1 new lira. That went for prices, wages savings etc so nobody lost anything but the prices too less space to write out.
Of course the lira has since undergone quite a bit more inflation (Putting you son in law in charge of finances of the country will do that).
A lot of people say inflation. But a lot of currencies are close to each other now because they started out the same.
The value of coins was the value of the metal in the coin. When countries made their own coins they made them similar to coins in other countries. Same material, weight and “value”.
Some countries made their coins different for some reason, like limited trade, lack of copper, silver or other metals.
For example if the lowest value coin was made out of iron instead of copper, the iron coin would be the “1 unit” coin.
There are actually two reasons. Like what everyone else said here, inflation is often the reason you see lower or higher exchange rates. The other reason is because some currencies aren’t measured in fractions like USD. For example, one Japanese Yen is equivalent (hypothetically, not the actual exchange rate) to $0.01 USD, or 1 cent, but the Yen doesn’t have the equivalent of $0.01. It is similar to measuring everything in cents. If you were buying a house, it would be similar to saying 20 million cents instead of $200k.
I get why some countries have such currency units (ultimately inflation). But why don’t they combat that by just removing large sums of cash from circulation? If the value of money is subjective, why can’t/don’t they just progressively remove large numbers of it until the value of a single unit reaches a more reasonable level?
Latest Answers