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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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!
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