how is one currency more powerful than another? If you exchange $100 to 102 francs don’t you still have $100 but in francs?
In: 53
Currencies and their value is decided by the guarantee the country that issues it provides. Lets get to the basic times where gold was the standard. One would just determine the value of currency by dividing the amount of gold by by the circulating currenciee and you would get the value. The more you divide the less its worth. Now as for your question, the difference or the value of 100 dollars to 102 francs is the stability of the economy. Dollars are pretty stable as most of the businesses operate from usa so its hard to imagine the fall of it. While take turkiah lira, the market instability could force its value to decrease thus while on the day you bought, its value was 100, but tomortow it halfs ita value
In addition to what others have said- it’s also interesting to think about how long it takes to earn that $100, as opposed to those 102 francs.
The federal minimum wage in the US is $7.25 so it might take you over 13 hours to make $100. The minimum wage in Switzerland is 20 francs/hour, so it only takes 5 hours and a few minutes at the cuckoo clock factory to make those 102 francs.
Even if the exchange rate is $100=102 francs, that money means something different to people in both countries.
The instantaneous exchange rate isn’t important. A strong currency is stable. Wild swings in value are destabilizing.
If the currency goes down that’s bad because you suddenly can’t buy as many foreign goods. If it goes way up, also not great – people will buy fewer goods that you produce.
Its complicated, but long story short, $100 USD is “real money” in the US. Everywhere else, its like a bartered good, which means its subject to market forces, and some merchants may not even accept it.
its kinda like whos line is it anyway. the numbers are all made up and dont really matter. we just all agree they matter and some people live like kings while others starve.
No. Two reasons.
First. Bottom line – no-one is trading in currency out of the goodness of their hearts. They’re in it to profit. And that’s going to cost you.
So – let’s say the published exchange rate is 1 franc to 1 dollar. If I sell you francs (Swiss maybe?), I want a profit. So I’ll only give you (say) 95 francs for your $100. And if you want to sell those 95 francs back to me, and buy dollars, I won’t give you $95 dollars – I’ll give you maybe $90 dollars and some change. You’ve swapped your currency twice, and lost money both times.
Second. The exchange rate fluctuates. It isn’t magic. It’s just what people are prepared to pay right now. If people suddenly decide that Switzerland is a good investment, they’ll want a better deal if they sell you their precious francs. Which is great if you’ve just bought some and want to sell them – you can get more dollars for them. But it’s lousy if you were planning a trip to Switzerland and need to change dollars into francs, because your dollars won’t buy as many francs, so your money won’t go as far.
Value of one currency over another changes over time. Today with your CHF$102 you can purchase USD$100 worth of bananas; but tomorrow it might be USD$60 worth of bananas.
**How?** Most countries’ economies like to have their own value denominator (currency). One of the factors that makes CHF$102 equal to USD$100 today, is how much other economies are willing to pay for francs or dollars today.
**Why?** Swiss people might make great watches that Americans wants; Americans make great computers that the Swiss wants. Swiss will be trying to buy dollars to purchase the computers and vice versa.
On the immediate term, the value is the same. If the value changes over time, that differential is where you either lose or gain.
If 1 Potato is worth 1 Banana on Monday, and you trade in 100 potatoes, you have 100 bananas
But, then if the value changes and suddenly 1 potato is worth 1.5 bananas, you still have 100 bananas, but they are now worth 67 potatoes. You do not lose “money” until you trade back to potatoes.
I used to program FOREX EAs as a side hobby. I made a ridiculous amount of money by scalping day to day value fluctuations. I also lost a ridiculous amount of money by scalping day to day value fluctuations. After 6 months, I netted about $200 gain. At one period of time, I had over $200k in gain, and my little trading bot decided to crap the bed at 1AM when our ISP had a momentary outage. When I woke up at 5am, the EAs weren’t running and the last places from around 11pm (with leverage) were tanking and there was nothing to stop them. It was a very sad day. After that, I pulled everything and told my wife “hey, I made enough to take us out to a fancy dinner!” Haven’t touched it since.
This very question bothered me so much it’s one of the reasons I studied economics.
Basically yes, you are right, in the long run. However, in the short term, the interest rate on the money of one country might be better than another, so everyone buys the stronger currency. Meanwhile, domestic prices of stuff haven’t changed *yet*, so you are getting more or less stuff for the conversion of your money.
So like converting inches to centimeters, neither the bigger amount per unit nor the smaller are “strong” or “weak”. But in the short run, *with recent changes*, currencies are strong or weak relative to each other.
Side note: strong and weak ≠ good and bad, respectively. A weak currency encourages exports, and a strong currency encourages imports.
You’re ignoring the fact that the same product in different countries can cost different amounts of money.
A PlayStation 5 is $500 in Canada whereas it’s only $400 in the US. If the Canadian dollar was on par with the USD then I would be way better off ordering a PS5 from the states because it would effectively be 20% cheaper.
Latest Answers