Wednesday, August 11, 2010

How does currency value work?

What sort of process do economists use to determine the value of a currency, especially in relation to other currencies? Is there a formula for it?How does currency value work?
Currency values are determined, in a sense, just like the price of any other good; it is determined by the supply and demand of the currency. Things that affect this supply and demand are things like trade and interest rates. For example, if the United States has a low interest rate (the rate banks will pay you for putting money in their accounts) other countries will lose interest in putting their money in our banks and will therefore lower the demand for U.S. currency, lowering it's value. In terms of trade, if the price of our goods is lower than the price of their goods, other countries will want to buy our goods, thus raising the value of the currency because demand is now higher. There is a formula for figuring it out, but I couldn't find it online. Hope this helps.How does currency value work?
They don't. There is an auction every day involving hundreds of thousands of bidders.

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