Why Different Currencies Have Different Values?

Summary

This video explores the complexities of currency values and exchange rates. It explains how money transitioned from the gold standard to fiat money, emphasizing supply and demand's role in determining value. Factors like inflation, interest rates, political stability, and trade balances are discussed as they influence currency strength. The video also touches on the Eurozone's challenges and the concept of currency pegging, concluding with the idea that a one-size-fits-all currency is not feasible.

Takeaways

• 🌐 Currency values differ due to various factors such as supply and demand, inflation, interest rates, and economic stability.
• 🏦 Historically, money was linked to precious metals like gold in a system known as the 'gold standard', which helped stabilize exchange rates.
• 💵 Fiat money, which is not backed by physical assets, relies on government decree and public trust for its value.
• 📈 Inflation erodes the value of currency over time, making it less desirable and leading to a decrease in its value.
• 📊 Interest rates influence currency strength by affecting investment attractiveness and the cost of borrowing money.
• 🌍 Foreign investment can boost a country's currency value by increasing demand for that nation's currency.
• 🚚 Exports increase demand for a country's currency, while imports can decrease it, as countries need the exporter's currency to conduct trade.
• 🔗 Some countries peg their currency to a stronger one to achieve stability, but this can lead to dependency on the stronger country's economy.
• 💼 A country's economic situation, including political stability and economic policies, can significantly impact its currency's value.
• 🌐 The idea of a single global currency is complex due to the loss of monetary policy control and the risk of economic problems spreading globally.

Q & A

Why does money have different values in different countries?

Money has different values due to supply and demand, economic strength, and various economic factors such as inflation, interest rates, and political stability.

What was the 'gold standard' and how did it relate to currency values?

The 'gold standard' was a system where a country’s currency was backed by a certain amount of gold, which helped keep exchange rates stable and prevented governments from printing excessive money.

What is 'fiat money' and how does it differ from money backed by gold?

Fiat money is currency that has value because the government declares it as such and people have faith in it, unlike gold-backed currency which has an intrinsic value tied to a physical asset.

How does inflation affect the value of a currency?

Inflation causes a currency to lose value because it represents a situation where there is more money in circulation relative to the amount of goods and services available.

What is the role of interest rates in determining currency value?

Interest rates influence currency value by affecting investment returns. Higher interest rates can attract foreign investment, increasing demand for the currency and thus its value.

Why do countries promote themselves to foreign investors?

Countries promote themselves to attract foreign investment, which increases demand for their currency, making it stronger and providing economic growth.

How does a country's stability affect its currency value?

A stable political and economic environment makes a country more attractive for investment, leading to a stronger currency as investors seek stability and consistent rules.

What is the impact of a country's export and import activities on its currency value?

Exporting more than importing increases demand for a country's currency, making it stronger, while importing more can decrease demand and weaken the currency.

What is the 'Petrodollar' system and why is it significant?

The 'Petrodollar' system refers to the practice where oil-producing countries sell oil only in U.S. Dollars, making the U.S. Dollar highly demanded globally and strengthening the U.S. economy.

Why might a country choose to peg its currency to another?

Pegging a currency to a stronger one provides stability and simplifies trade, but it also makes the country dependent on the economic performance of the country to which its currency is pegged.

Why don't all countries use the same currency to avoid exchange rate issues?

Using a single global currency would require countries to relinquish control over their monetary policy, making it difficult to address individual economic challenges and potentially spreading economic crises globally.

Should a country always strive to have a strong currency?

Not necessarily. A strong currency can be beneficial for import-dependent countries but may hinder exports for countries that rely on selling goods abroad, as it makes their products more expensive.

Outlines

00:00

🌐 Understanding Currency Values

This paragraph introduces Bob, an American, who is puzzled by the varying values of currency when traveling to Germany and Vietnam. It raises questions about why the U.S. dollar isn't equal to the Euro or the Dong and why exchange rates fluctuate constantly. The script then delves into the history of currency, explaining the transition from the gold standard, where currency was backed by gold, to fiat money, which derives its value from government decree and public confidence. The value of fiat money is determined by supply and demand, with strong economies like the U.S. having a higher currency value due to greater demand.

05:00

📈 The Impact of Inflation on Currency

In this section, the concept of inflation is explored, which is the devaluation of currency due to an excess of money relative to available goods and services. High inflation leads to a decrease in currency value because people are less inclined to hold a depreciating asset. The example of Zimbabwe is used to illustrate how economic mismanagement led to a drastic devaluation of its currency, culminating in the adoption of more stable foreign currencies.

10:03

💹 Interest Rates and Currency Strength

This paragraph explains how interest rates, which are set by central banks, influence the strength of a country's currency. High interest rates attract foreign investment, increasing demand for the local currency and thus its value. Conversely, falling interest rates can reduce demand and weaken the currency. However, high interest rates also increase the cost of borrowing, which can slow economic growth and lead to unemployment. Therefore, central banks must balance interest rates to support both investment and economic stability.

🌍 Foreign Investment and Currency Demand

The role of foreign investment in shaping currency value is discussed here. When countries like China open up to foreign investment, it increases demand for their local currency, strengthening its value. Investors prefer stable political and economic environments, as instability can lead to financial losses. A stable economy reassures investors that the currency is less likely to lose value suddenly, making it more attractive for investment.

🚚 Exports, Imports, and Currency Exchange

This section discusses how a country's trade balance affects its currency value. Exports increase demand for a country's currency, as other countries need that currency to purchase goods. Imports, on the other hand, increase demand for foreign currencies. The U.S. dollar's status as the primary currency for oil transactions is highlighted as a strategy to maintain its global demand and strength. In contrast, countries with little to export may use stronger foreign currencies for trade.

🔗 Currency Pegging for Stability

The concept of currency pegging is introduced, where a country ties its currency to a stronger one to achieve stability. Examples include Brunei pegging to the Singapore Dollar and Belize to the U.S. Dollar. While this approach provides stability and simplifies financial management, it also makes the country's economy highly dependent on the stronger nation's economic performance.

🌉 The Challenges of a Single Global Currency

The paragraph contemplates the idea of a single global currency and the challenges it would present. Using the Euro as an example, it points out the benefits of a unified currency within the Eurozone but also the issues that arise when one country's economic crisis impacts others. The paragraph concludes by questioning whether a single global currency is feasible, given the diverse economic needs and risks associated with such a system.

Keywords

💡Currency

Currency refers to money in any form when in use or circulation as a medium of exchange, especially circulating coin and paper money. In the video, the concept of currency is central as it explores why different currencies have varying values and how they are exchanged between countries.

💡Exchange Rates

Exchange rates are the values at which the currencies of different countries are bought or sold for one another. The video discusses how exchange rates fluctuate and affect the value of money, such as how 1 U.S. dollar is equal to 90 cents Euro or 25,000 dong in Vietnam.

💡Fiat Money

Fiat money is a type of currency that is not backed by a physical commodity like gold or silver and gets its value by government order that it must be accepted as a form of payment. The video explains that most modern currencies are fiat money, and their value is derived from supply and demand and government decree.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video uses the example of Zimbabwe to illustrate how high inflation can lead to a drastic devaluation of a country's currency.

💡Interest Rates

Interest rates are the percentage at which interest is charged on loans or earned on savings accounts. The video explains how interest rates set by central banks can influence the demand for a country's currency, affecting its value in the foreign exchange market.

💡Foreign Investment

Foreign investment involves investing in a business or asset that is located outside of the investor's home country. The video discusses how countries that attract foreign investment can see an increase in demand for their currency, which can strengthen its value.

💡Supply and Demand

Supply and demand are economic concepts that describe the relationship between the quantity of a resource and the willingness and ability of people to buy it. In the context of the video, the value of a currency is influenced by the supply and demand dynamics in the market.

💡Hyperinflation

Hyperinflation is a rapid and uncontrolled rise in inflation, typically characterized by a dramatic devaluation of a currency. The video uses Venezuela as an example of a country that experienced hyperinflation, leading to a significant decrease in the value of its currency.

💡Petrodollar

Petrodollar refers to the US dollars received by oil-producing countries in exchange for selling oil. The video explains how the U.S. dollar became the global currency for oil transactions, which has had a significant impact on the strength of the U.S. dollar.

💡Currency Pegging

Currency pegging is a monetary policy where a country's currency is fixed to the value of another single currency, a basket of currencies, or to another measure of value, such as gold. The video gives examples of Brunei and Belize, which have pegged their currencies to the Singapore Dollar and the U.S. Dollar, respectively.

💡Debt

Debt refers to an obligation owed by one party to another. In the video, the concept of debt is mentioned in the context of a country's economic stability, where high levels of debt can make foreign investors wary and potentially lead to a decrease in the country's currency value.

Highlights

Bob's journey from using U.S. dollars to Euros and Dongs illustrates the concept of currency exchange rates.

The historical shift from the gold standard to fiat money explains why currencies are no longer backed by physical assets like gold.

Fiat money's value is determined by supply and demand, influenced by factors such as trust in the government and the strength of the economy.

Currencies of strong economies like the U.S. dollar are more valuable due to higher demand.

Hyperinflation in countries like Venezuela leads to a decrease in currency value as people lose confidence in the money.

Inflation causes a currency to lose value as there is more money than available goods and services.

The example of Zimbabwe's economic crisis shows how currency value can plummet due to mismanagement and printing of money.

Interest rates play a crucial role in attracting foreign investment, which in turn affects currency demand and value.

High-interest rates can strengthen a currency, but they also increase the cost of borrowing, potentially slowing the economy.

Foreign investment can boost a country's currency value, but it requires a stable political and economic environment.

Exports increase demand for a country's currency, making it stronger, as seen with Japan's car exports and the demand for Yen.

The 'Petrodollar' system, where oil is sold in U.S. dollars, has made the dollar a global currency and strengthened the U.S. economy.

Fixed value currencies, like Brunei's peg to the Singapore Dollar, provide stability but can lead to dependency on the stronger currency's economy.

The Eurozone's shared currency has benefits for travel and trade, but it also means countries must sacrifice control over their monetary policy.

A single global currency could simplify trade, but it also poses risks as one country's economic problems could affect the entire world.

Not all countries want a strong currency; importers may prefer a strong currency, while exporters may want a weaker one to boost sales.

China has been accused of currency devaluation to make its products cheaper for other countries, highlighting the strategic use of currency value.

Transcripts

Hey there! So, this is Bob. He lives in America,  where he uses the U.S. dollar almost every day.  

Now, he wants to travel to Germany, which uses  the Euro as its currency. But when Bob tries to  

exchange his money, he finds that 1 U.S. dollar is  equal to 90 cents Euro. Then Bob goes to Vietnam,  

where 1 U.S. dollar is equal to 25,000 dong. Wait,  hold on. Why does money have different values?  

Why isn’t 1 U.S. dollar equal to 1 Euro  and 1 Dong? And why do exchange rates keep  

changing every second? In this video, we’re  going to dive into the world of currencies,  

exchange rates, and why money isn't just… equal! Before we talk about the reasons behind different  

currency values, let's first cover a short  history of currency. For a long time,  

money was directly linked to precious metals  like gold. This was known as the "gold standard."  

Under the gold standard, a country’s currency was  backed by a certain amount of gold. For example,  

the U.S. dollar was once tied to a fixed  amount of gold. This helped keep exchange  

rates stable because a country couldn’t just  print more money without having more gold. It  

stopped governments from printing too much money. But as economies grew and global trade expanded,  

countries started moving away from the  gold standard. It was getting harder to  

keep enough gold to back every unit of currency,  especially during wars and crises. By the 1970s,  

most countries had switched to a  new system called "fiat money." 

Fiat money is currency that has value  because the government says it does,  

and people believe it. It’s not backed by  any physical asset like gold. That’s why  

some people call it "fake money." If you want to  learn more about this, let me know in the comment  

section, and I can make another video for it! As fiat money has no physical value like gold,  

its value depends on whether people still  want it or not. If many people want the money,  

they will compete to get it, making the value of  the money go up. But if nobody wants the money,  

its value goes down. So, the value  of fiat money comes from supply  

and demand. That’s why the currency of  strong economies, like the U.S. Dollar,  

is higher in value because more people want it.  Meanwhile, the currency of weaker economies,  

like Venezuela, which had hyperinflation, is  much lower because nobody, not even Venezuelans,  

wants it. So, in this video, we will look at  how supply and demand affect the value of money. 

Section 1. Inflation. So, inflation is when the  currency starts losing its value. Simply said,  

it’s where there’s more money compared to  the amount of product and service. You can  

watch my video about “Why don’t we just print  more money” to understand more about this. 

So, when a country has high inflation,  its currency’s value will decrease.  

Why? Because nobody wants to buy and hold a  currency that is losing value. For example,  

in 2022 you can buy 2 loaves of bread for $10.  But due to high inflation, 2 years later in 2024,  

you can just buy a loaf of bread for $10. So,  you buy fewer things with same amount of money. 

A real-life example is Zimbabwe. In the 1980s,  the Zimbabwean Dollar was worth more than the U.S.  

Dollar — 1 Zimbabwean Dollar was equal to 1.35  U.S. Dollars. But due to their failed land reform,  

economic problems, corruption, international  sanctions, and printing money mindlessly,  

the value of the Zimbabwean Dollar  dropped dramatically. By the 2000s,  

1 U.S. Dollar was equal to almost 600,000  Zimbabwean Dollars. The government tried  

to fix it by changing the currency several  times, but in the end, they gave up and  

started using more stable foreign currencies  like the U.S. Dollar and the South African  

Rand. Even though the latest news is Zimbabwe  trying to get back their original currency. So,  

plus 1 point for never giving up to Zimbabwe! Section 2. Interest rate. You might have heard  

about interest rates before and wondered  why they matter so much. Interest rates  

are the cost of borrowing money in percent.  If you borrow $1,000 at a 10% interest rate,  

you have to pay back $1,000 plus an extra $100  as interest. Central banks, like the Federal  

Reserve in the U.S., set interest rates in their  countries. When a country has high-interest rates,  

it offers better returns on investments,  attracting foreign investors. These investors need  

to buy that country's currency to invest, which  increases demand and strengthens the currency. 

For example, you want to invest in government  bonds. Government bonds are when you lend your  

money to the government for a set period  of time, then the government will return  

your money with the interest. Let’s say you buy  a governmental bond for $1,000 with 5% interest  

for 10 years. It means the government borrows  your $1,000 and will pay you 5% interest on  

$1,000 which is $50 every year for 10 years.  So, the logic is, the higher the interest  

rate, higher the return of investment. So, if the interest rate in the U.S. is  

higher than in Germany. Investors might sell  their euros and buy U.S. dollars to invest  

in American bonds or savings accounts with  higher returns. This increased demand for  

U.S. dollars strengthens the currency. On the  other hand, if U.S. interest rates are falling,  

it offers lower returns, and investors might look  elsewhere. This reduces demand for U.S. Dollar,  

causing its value to decrease. But a country cannot just make its  

interest rates as high as possible to attract  investors. Why? Remember! Interest is the cost  

of borrowing money! High-interest rates also  mean it becomes more expensive for people and  

businesses in that country to borrow money.  If borrowing becomes expensive, fewer people  

buy homes or start businesses. This can slow  the economy and lead to unemployment. So, the  

central bank needs to increase and decrease the  interest rate based on the country’s situation. 

And that’s why everyone is afraid of this  guy when he announces the U.S. interest rate. 

Section 3. Country situation and foreign  investment. When China opened up its market  

in the late 1970s to foreign investors, lots of  foreign companies started to open their business  

in China. If they wanted to open factories in  China, of course they needed Chinese currency  

which is Yuan or Renminbi to buy the land, built  the factories, pay the workers and other expenses.  

So, it just makes more demand for Chinese Yuan and  make the Yuan value stronger and give China lots  

of money. That’s why almost all countries promote  their countries to foreign investors and lure them  

to invest and do business in their countries. But foreign investors won’t just invest in  

any country. They look for countries with  stable politics and economies. Why? A stable  

government means consistent rules and laws for  businesses. For example, if a country promises  

low taxes to attract foreign businesses, but  then suddenly raises taxes, it becomes more  

expensive for those businesses. They could lose  money. If a country keeps changing its rules,  

businesses won’t feel safe investing there. Similarly, if there are lots of protests or  

strikes, it can disrupt production and make  it hard for businesses to operate smoothly.  

A stable economy is also important because it  means the country’s money is less likely to lose  

value suddenly. If a country has a lot of debt,  high inflation, or frequent economic problems,  

foreign investors worry they might lose money.  So, a stable country is more attractive for  

investment, which helps keep its currency strong. Section 4. Export and import. When Japan exports  

cars to other countries, those countries  need to use Japanese Yen to buy the cars.  

This makes the Yen high in demand. If Japan  imports coal from Australia, they need to  

use Australian Dollars to buy the coal, which  increases demand for the Australian Dollar.  

Most countries try to export more so that others  need to buy their currency, making it stronger. 

For example, when the U.S. convinced oil-producing  countries like Saudi Arabia to sell oil only in  

U.S. Dollars, it made the U.S. Dollar highly  in demand. Since almost all countries need oil,  

they have to get U.S. Dollars to buy it.  This made the U.S. Dollar a global currency.  

Strengthening the U.S. economy and influence as  the number 1 in the world. This is known as the  

“Petrodollar.” Even though there’s rumor that  Saudi try to accept other currencies also. I can  

also make another video about it if you want. On the other hand, small island nations in the  

Pacific, like Tuvalu, don’t have much  to export, so their local currencies  

aren’t widely used. Instead, they use  stronger currencies like the U.S. Dollar  

or Australian Dollar to make trade easier. Section 5. Fixed value. So, if you want your  

country to get stable and strong currency and  also doesn’t want to be hassle about it, then  

just use this trick. Just peg your currency to  other currency of stronger and stable countries.  

For example, Brunei an oil-rich small sultanate  in South East Asia pegged their currency 1:1 to  

Singapore Dollar. So, it means both currencies  have exactly same value. And that’s why you also  

can use Singapore Dollar in Brunei and vice-versa. Another example is Belize, a small country next  

to Mexico, which pegs its currency, the Belize  Dollar, to the U.S. Dollar. They set the rate  

so that 1 Belize Dollar is always equal to half a  U.S. Dollar. So, if you want to change your U.S.  

Dollar to Belize Dollar, you don’t need to see  the exchange rate, just double the amount. It’s so  

easy, isn’t it? Pegging a currency makes it stable  and easy to manage, but the country becomes very  

dependent on the stronger country’s economy.  If the U.S. Dollar falls, the Belize Dollar  

will fall too. So, if one currency "lives," the  other "lives"; if one "dies," the other "dies." 

So, these are some reasons why currencies have  different values. Your next question might be:  

Why don’t all countries use the same currency,  like a "World Dollar," so we don't need exchange  

rates and all these hassles? Well, it sounds  like a great idea, but it’s not that simple. 

Let’s look at the Euro as an example. It’s very  convenient for people living in the Eurozone  

because they can travel across countries without  needing to exchange their money. But the challenge  

is that every country has to give up control  over its own money to the European Central  

Bank. This means a country cannot change its  monetary policy just to fix its own problems  

because it could also affect other countries. For example, when Greece had a financial crisis  

in 2009, the effects spread to other Eurozone  countries. And that’s why Germany is not so happy  

with Greece about this. So, if all countries  in the world decided to use a single currency,  

it would be very risky. Imagine living your  best life, but then facing inflation and a  

crisis just because a country thousands of miles  away messes up its economy. One country's problem  

would become a problem for the whole world. And maybe your next question is, "Should we  

make our currency as strong as possible?" The  answer is. Not really. As you know that different  

countries have different needs. For example, a  country that imports a lot, like Singapore, may  

want a strong currency to make imports cheaper. While a country that exports a lot, like China,  

may want a weaker currency to make its products  cheaper for other countries. That’s why China has  

been accused of purposely lowering its currency’s  value, called currency devaluation. How does  

this work? I’ll explain it in another video. If you want me to make other videos explaining  

these topics, please like and subscribe. Thanks for watching.