Why Different Currencies Have Different Values?

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.