I have never really understood how $1 is equal to x amount in another currency. Ik how metric and imperial systems can be converted to each other as length, weight, etc. can be measured. So how is money measured? And why does the currency rate keep fluctuating everyday?
In: Economics
That’s why they fluctuate.
Lets say a coke costs $1 in the usa, and 75 pence in the UK, well then since we have the same item with two different prices we can assume that $1 will buy just about as much as 75 pence in the UK, and so that is what people will exchange it for.
But sometimes, currency exchange is also based on not only what is happening, but what people THINK will happen. In Venezuela they are having a terrible time with their economy due to financial mismanagement by the government and corruption. So if you wanted me to exchange my dollars for Venezuelan money, the Bolivar, I’m not going to do it. In fact, it gets harder and harder each month to find people who are willing to do an exchange like this, so the people who need dollars are having to offer more and more Bolivars in order to get someone to give them dollars. The reason is that the people with dollars are thinking the Bolivar will eventually become worthless and not be accepted anywhere if a civil war breaks out or something like that.
So it’s like that to a lesser degree with all currencies. Some are strong and stable, some have problems. Some governments you trust, and some you don’t. So depending on what is going on with each country, people have more confidence or less confidence in their currency and what it will buy in a month, or six months, or a year, or ten years. So that affects their willingness to exchange what they have for what someone wants to offer them. Hence the price fluctuations.
Latest Answers