I’m never fully understood how currencies fluctuate beyond a layperson’s understanding of inflation/deflation, but still always assumed that $5 is $5 regardless of what currency it’s coming from or going into. But recent experiences have made me question that. M Not sure if this is the best way to ask my question because I think i actually have multiple closely related questions, so I’ll use examples instead:
My dad was recently in southeastern Europe and tried to pay for something at a store – they asked if he had dollars (or the local currency, i can’t remember) because it’s cheaper that way. If something costs $5, and I just exchanged the money into local currency, the merchant should be getting 5$ worth of currency regardless, no?
We went to Argentina in the spring, where it’s common for travelers to exchange dollars for pesos at non-government exchanges for a better rate. How does this happen? Are these exchanges getting dollars for less somehow, and thus able to offer better rates?
Again, I assume these questions are related, but what are the underlying concepts here? Thanks in advance!
EDIT: thanks everyone! I think between each of the responses I understand what I was missing!
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For your first question about paying in dollars:
Currently a dollar is worth 0.94€ (assuming you were in the euro zone). So what I think they did is offer to take 5$ when the price was 5€. And you would have paid 4.70€.
So they would lose money compared to a trade in euros, but at the same time incentise you to buy something.
Exchanging currency often comes with fees to do the transaction. Those “non-government exchanges” aren’t free. You have to pay a fee for the transaction, then once you have the local currency you can just pay as normal. Or, a lot of places where tourism is very common will have an exchange rate at the register (but will probably build this fee into the price they charge you).
Protip: Try to find a credit card with a No Foreign Transaction Fees benefit when traveling. You’ll pay no fee and CC issuers are I believe required by to give you the true exchange rate at the time of the transaction. If you ABSOLUTELY need cash, find a major bank at your destination and withdraw from an ATM. You’ll pay a fee but it’s usually far lower than going to a currency exchange location (and some Checking accounts now refund a certain amount of ATM fees per month).
Okay, I think people are not understanding. What you’re asking is, if an item is $5 USD, shouldn’t then the price in local currency should be equivalent?
The cost of the price you pay for an item isn’t just the item itself, but transportation costs, local taxes, and tariffs that may be charged by multiple countries as the item is shipped across boarders.
Even in America, things sold in Alaska and Hawaii are more expensive because of the extra costs to get the item there
The value of money is what you can purchase with it tomorrow. If someone takes $5 for something, it’s because they think they can purchase $5 of stuff with it. If you won’t be able to purchase as much with it later on, you’ll demand more of it now. Because Argentina keeps pumping out money (making each individual peso worth less), forbids its people from exchanging pesos for dollars at their real value, and prevents its people from getting their money out of the country, having a dollar is *a lot* more valuable than having a peso. People will give you more goods and services to get a dollar, including more pesos than the government says they are allowed to give.
Dollars are a stable currency. They are what’s called a reserve currency- a small member of currency that have a much higher value than most other currencies. Others Include the Pound Sterling, Japanese Yen and the Euro ( previously it was the Deutschmark). They are issued by politically and economically stable countries/blocs.
Because these are stable currencies people importing goods ( say in the country your dad visited) will often have to pay for imports in dollars for example. But to get dollars they’d have to exchange local currency for which they’d be charged a fee. Also the value of local currency can fluctuate relative to the dollar so it makes pricing difficult and they may have to effectively pay alot more if local currency weakens relatively to dollars.
If however the shop keeper sells in dollars, they can then use dollars to buy imports- they save on the fee and eliminate the uncertainty due to exchange rate fluctuations.
Essentially because the value of dollars is more certain, the person selling to you will give you a slightly better price to reflect that certainty.
Let’s say there’s no such thing as “money”. Instead, we still trade things for other things.
Now you sell pizzas, and I want one of your pizzas. Let’s say I want to trade you some of my gold for one of your pizzas. How much gold should I give to you?
Now let’s say I want one of your pizzas but the only thing I have is shit. And by shit I mean actual, factual shit. Again, how much of my own shit would you want for your pizza?
Ah, but now let’s say I still have shit, but a different kind of shit. Let’s say I have Guano. How much Guano would you like for one of your pizzas?
As you can see, while I can pay for a pizza with literal shit, some shit is more valuable than other shit. The same happens with money: the money of a country can be valued by others as “more valuable” that the money of other countries.
Money exists to describe value. It exists so that if I have eggs and I need a wrench, I don’t need to find someone who wants to trade eggs for a hammer specifically. So, we all agree that a certain kind of a coin, or a bank note, for example, is equal to a certain small part of all the things and all the labour we have in our economy.
Now, the thing is, these tokens only work as symbols for all the valuable things we have if there is a limited supply of them. We cant use rocks because you could cheat and just go collect more rocks! It doesn’t matter how many there are, but there has to be a limited amount.
Let’s imagine that our economy only has three eggs and three bottles of milk. We’ll just mint six coins, and now we can trade all the things, right?
Well, no, because someone just went and milked some cows, and now we have three eggs and nine bottles of milk in the economy. If you happen to have a coin, now you can buy double what you would have gotten yesterday with it. Great, right?
Well, no again. Because that same guy will keep milking more cows tomorrow, so the longer I keep my coins, the richer I get, without having to do anything! That’s called deflation. Well, now our money is broken, because no one wants to use it, everyone just wants to hold on to it, and if I want to get a wrench, I have to back to finding someone who wants eggs again.
To fix this, we need to keep adding a little bit of new coins into our economy to reflect the fact that our economy keeps growing. People are milking more cows and building more houses and making all kinds of new stuff, so we constantly need more coins to describe all that. But if we guess wrong how much stuff there will be tomorrow, something goes wrong, perhaps a cow gets sick and dies, well now we have too much money in the economy, so now you need more coins to describe the same amount of all the value in our economy. That’s called inflation. It’s a careful balancing act to keep the economy running smoothly.
Now, let’s say I want bananas, but nobody in our economy is growing bananas. There are no bananas to buy, so I have to go to another economy to buy them. There they do exactly the same balancing with their money as we do with our money, but they use different kinds of coins to describe parts of value in their economy. I have to find someone who wants to trade some of our economy’s coins for their economy’s coins.
Since the two economies probably have different total numbers of coins in circulation, and since the economies probably have different amounts of valuable stuff in them altogether, we have to figure out how many each of us should give and get for a fair exchange.
Sometimes the economies grow at different speeds. Sometimes one of them puts too many new coins into circulation. Sometimes there may be more people in our economy wanting to buy stuff from their economy than vice versa, so it may be difficult to find someone to exchange coins with due to competing offers, and I may have to accept a less fair trade of coins.
All of those things affect the currency exchange ratio, among with other similar but more complicated factors.
Now, in reality, there are companies who specialize in matching people who want to exchange currencies, kind of like a dating service. And like with dating services, you don’t have to use them, but for a price, they can make it more convenient to find a counterparty and save you some trouble. But if the price of their matchmaking service is to high, people might try their luck on their own and see if they can find someone to trade currencies with on their own.
EDIT: I realized after typing that I answered the wrong question. I added some clarification to the end, but ask if it’s still unclear!
For the case of Argentina, first of all, and speaking as an Argentinian, don’t try to understand Argentina’s economy using any type of logic. In fact , for the sake of your sanity, don’t try to understand Argentina’s economy period.
That said, the government currently limits how many dollars a layperson can “buy” legally per month (ie, exchange pesos for dollars in the official market). So the “blue dollar” holds a value more or less based on demand for dollars in the black market, not by the official exchange rate (arguably, the “real” value of the dollar is closer to this “blue” value than the official one… But politics gets too complicated, of course)
lets use turkey as an example since i don’t know anything about argentina. their currency, the lira is currently in a nosedive relative to the more stable currencies around the world like dollar and euro.
that means if you keep your money in Lira, it will loose value over time. if you have enough lira today to buy 100 apples, it might only be enough for 80 next year. however, if you keep your money in dollars, you’ll still get the 100 apples.
many places with a somewhat unstable currency make it hard to exchange money. people trying to preserve their life savings by exchanging to a more stable currency actually make the nosedive worse. in these places, it’s usually relatively easy to exchange smaller amounts of cash, but much harder to exchange large amounts of money saved in accounts. these unofficial places also usually only offer a good exchange rate in one direction. you’ll get 100 lira for one dollar, but if you want to do it the other way around, especially with serious amounts of money, it can easily be something like 150 lira to one dollar.
if you’re a merchant in a place that suffers from an unstable currency, it can therefore make sense to accept dollars at a favorable exchange rate. you can then keep the dollars as your life savings. or you can head to the nearest exchange place and get the local currency to use in everyday life.
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