how a lower currency value isn’t a sign of poor economy like in Japan?
In: Economics
the value of a currency is set by many factors.
Its called a backing, money is just a number or a piece of paper whos value is set by how much faith people have in the issuer of that currency.
originally there was the gold standard, meaning that the value of a currency was set by the amount of money in circulation devided by the value of the gold reserves of that country, this was ended in the 1970´s with nixon becuase people were abusing the gold standard to get cheap gold and the strenght of the currency was causing problems at a time where the US economy couldnt handle it.
anyways… the gold standart also ignores added value, if i take a tree and i want turn it in to a chair, if im just using the value of the wood then the tree and the chair have the same cost, but added value means the value to add to a commodity like the wood by transforming it.
The tree is worth less then the wood planks, the difference is the cost of chopping down the tree and turn it in to a format you can use to build things. the wood plans are worth less then a chair, the difference is the work taken to cut down the plans to the pieces and putting it togather, by using a standard tied to a commodity like gold or oil, you ignore the work taken to transform that commodity from one form to another.
so back to the basics, money is not actually money… its a note that says that the issuing entity (goverment, central bank, local bank) owes you X dollars/euros/yen worth of resources. and is accepted as legal tender, meaning its an acceptable form of exchange of goods and services in a market.
and the issuing entity can varie the value, the value is set by the seen value of the economic value of issuing entity, tax revenue and production of a country, resources they own, commodities they own or can exploite, forigne debt or currency held… basically it all comes to a number, and in a very simplifed description of the process this figure is divided by the value of circulation/printed currency to set a value.
Now an issuing entity can manipulate this value by issuing more currency or buying back currency from the market and removing it from circulation.
so if japan wanted tommorow they could say 100 yen are now 1 New yen, if they have a trillion yen in circulaiton, only issue only issue 10 billion in new yen, and then you just slashed 2 zeros off the currency, all that costs money and effort… and is 100% worthless.
Becuase the number of zeros on a bill might have a psycological effect, but in reality you have to take in to account the concept of economic proporcionality.
Since currencies are attached by an exchange rate, if 1 dollar buys you 100 yen or 1 new yen, it dosnt matter, its just an arbitary value , whats important is what you can buy with it.
If a can of coke was 100 yen, but now its 2 new yen, you basically devalued your currency by half and everything costs twice as much. so usually goverments produce a customer price index which is made to control the general value of the currency, basiclly it compares the the value of the currency compared to set products in the market, so basically yo track the price of several base products, eletricity, bread, gasoline in comparison to the value of your currency.
If bread goes from 50 cent to 1 buck for a loaf, it dosnt mean your currency lost half its value, could be that the price of labor has gone up, or the price of wheat has gone up or the price of gas has gone up and its more expensive to move the bread from the bakery to the market.
but if bread costs more, gas costs more, electricity cost more, you´re going to go your boss and ask for a raise, so your salaray will rise but your boss will have to charge his clients more to pay for your salary to keep the business going.
Meaning everything costs the same, but in proportion the numbers are bigger… this is inflation, the market compensating for the rise of costs.
so basically, we go back to the concept of economic proporcionality, it dosnt matter how many zeros on the bill, it matters what you can buy with it. if your economy is shit, you cant buy a lot, if your economy is good then you can buy many things with it.
so it dosnt matter if 100 yen is a dollar if a coke costs 100 yen, it does matter if a coke costs 500 yen.
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