How can the value of a currency go up or down? Surely £1 will always be worth £1 and $1 will always be worth $1?


How can the value of a currency go up or down? Surely £1 will always be worth £1 and $1 will always be worth $1?

In: Economics

Yes 1$ will always be 1$, but what you can buy with 1$ will not always be the same thing.
Suppose the value of your currency goes down halves, you’ll have to spend 2$ for what used to cost 1$.

The name of the currency isn’t it’s value.

$1 is $1, by definition. But it’s value is how much goods and services it can buy.

So if you can buy all the necessities needed to live for a month for like 2 grand today, but in 2025 those same exact things cost 4 grand, then the value of a dollar went down by half, even though it’s still a dollar.

This can happen several ways. If a country just prints more money but has the same goods and services, each piece of money will be worth a smaller amount of the total goods and services. If the costs of production rise, factories will raise their prices and it will take more dollars to buy the same thing. If the demand increases without a production increase, like all of a sudden there’s 2x the birth rate and there’s way more mouths to feed without more stuff being produced, then each person gets a smaller percent of the total goods for the same percent of the total money

Let’s say I have a piece of gold. And I print one piece of f paper and say it’s one dollar’s worth of gold.

You accept this because it’s easier to carry.

As long as there’s always the gold to back the paper, the value of the paper doesn’t really change.

But what if I say…. I want to do more. So I print ten pieces of paper, say they’re all worth a dollar or a euro, but all ten are only backed by the one dollar’s worth of gold (which is a great medium of exchange)

Now, each dollar is only worth one tenth of what it was before. It’s still worth a dollar, but a dollar isn’t worth as much.

That’s why your house – on average, with the exception of bubbles or genuine growth in industry – is always worth the same.

Sure it goes up in dollar amount, but that is really just the dollar amount falling. The actual value adjusted for inflation, is pretty stagnant.

What other answers mostly missing is a free markets. Firstly, usually every currency have a bank that prints new banknotes. This bank (called emitent bank) then gives loans to other banks, which will give loans to companies or people, or government to do it’s business. Each loan have it’s interest and this interest partially defines inflation rate (but emitent bank can’t just make some random interest rate, because that will probably cause economic collapse, instead emitent bank analyzes current economic state in country and world and tries to guess optimal interest rate). Inflation reduces value of currency, because as amount of this currency getting larger, world is less and less interested in it). Different currencies have different inflation levels, therefore some currencies values in other currency getting lower and lower. This has been said by other users.

But inflation and overall economic state of country depends largely on international trade. If you produce more goods than you buy, or if you buy raw materials and produce some demanded goods from them, therefore increasing value of your goods, then your country accumulated more and more foreign currencies, and more other countries accumulates your currency, which leads to demand of your currency, which increases it’s value. And vise versa – if your country labor efficiency is lower than that of the whole world, if your country buys more than it can afford, than it sales, then it’s currency is less and less valuable and it’s economic suffers. Also, there’s investment interests. If some rich people believes that some projects or companies in your country will be profitable, they can loan money to them, but for that they’ll need to exchange their money to your local money and that will increase it’s value. So, the more investors interested to do business in your country the more your currency grows compared to other, and vise-versa – if investors taking their assets from your country, then currency of your contry returns to your contry and overwhelms your local markets, which increase inflation and lowers currency value.

Basically, currency is like a blood of the country. It should be enough for it’s needs and it should flow from place to place, both too small or too many, or slowing money flow will lead to serious issues. But unlike blood, it should be exchanged for other currencies to show it’s value, to be more valued. Economic perturbances which leads either to shortage or overfilling of currency on any market (local or global) leads to all sorts of economical troubles and devalues currency.

TL;DR: the more foreign trade some country have – the less it’s currency inflation and therefore the more it’s value grows compared to other currencies. Shrinking foreign trade or investments means rapid inflation growth and rapid devaluation of it’s currency.

But $1 isn’t always worth £1.20. As the value of one currency changed relative to others, that affects the costs of imported goods and things made from imported materials.