Why do different currencies have different values, like why is the AUD different to the USD?
In: Economics
Currency is sold just like stock or cupcakes. From US traveling in AU, use a charge card. The credit card company has to scrounge up $150AU to pay the vendor so it has to buy it on the market. Let’s say it costs them $100USD on the market. Then the exchange rate is 150AUD for 100USD. The exchange rate is 150 AUD to 100USD.
Governments, major banks, etc buy and sell currency all the time. For example: A major bank in the US has people turning in Euros from a trip for USD all the time (thing Citi, WellsFargo, BofA, …). Some go for the next days credit card purchases, may be some don’t. At some point over time the bank acquires a bunch of Euros and sells them for USD (or something else). There are people in banks that do that all day, look up the word arbitrage.
Currency is a representation of wealth to make trade easier. Wealth increase overtime in general and so you want to introduce more currency proportionally to the increased wealth of your country. So how much new currency do you introduce? Not all countries increase in wealth at the same rate and so the impact that your new currency will have on the economy will be different depending on the country.
In addition, do you really want to trust someone else to introduce the right amount of currency into the economy? Most countries want to keep control over that to make sure that someone else don’t make a big mistake and create economic problems.
So in the end the demand (wealth) and currency (supply) will be different in each country, which lead to different value.
The value of currencies is “imaginary”. Its value is only defined by how much product it can buy. Imagine two products in two countries. Milk and eggs in America and Australia. In America, milk costs $1.45, and in Australia it costs $1.00. Now, eggs cost $2.00 in Australia and $1.70 in America. Which currency is worth more? The American currency can buy more eggs, but less milk. On average (in this hypothetical) everything is slightly pricier in the American currency, and so it is worth less.
Currency from each country is determined by how much gold that country has in relation to the amount of currency in circulation.
This is also a part of inflation – if you make too much money in the mints, the value of it goes down.
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