Would someone give me the short version of this basic economics question?
 

What exactly determines the strength of a given country's currency? If that country does ??? then the value in relation to other currencies goes up....and if it does ??? the value goes down.


Any brief and helpful posts will be appreciated. Thanks.



slang

What? Are you writing a term paper? In one word - confidence. Why don't people buy Mexican pesos or Brazilian cruzeros? Because no one has much faith in the Mexican or Brazilian government's ability to put its money where its mouth is.

I basically agree with Marichiko. Normally, high inflation, trade imbalance, domestic unrest, would affect a currency.

In the case of a trade imbalance, the system would normally be self adjusting. For example, if we bought too much in goods from China, our currency would be devalued, Chinese goods would become more expensive, American goods would become cheaper for the Chinese, and the trade imbalance would slow down, stop, or reverse.

This is why the US is demanding that China stop pegging it's currency to the dollar, which prevents this from happening.

An easy way to get a good fix on daily trends would be a Consumer Price Index, sort of like comparison shopping.

Take the current average price of a number of selected items in each currency, add them up and compare it to some fixed baseline number. Then you'll have the relative purchasing power of each.

What, The Firm doesn't explain that? :cool:

From last weeks Molly Ivins.
The United States is more than $7 trillion in debt (no problem); China buys $1 billion worth of U.S. treasury bills a day (thanks for floating us); Americans love the prices at Wal-Mart (made in China -- cute!); the Chinese save 50 percent of their domestic product; the average American has $9,000 on his credit cards; our economy is fueled by a fragile housing bubble; the minimum wage is $5.15 per hour; taxpayers who earn more than $1 million saved $30K under Bush tax cuts; the war in Iraq costs $9 billion a month; by 2040, our kids will be unable to do more than pay the interest on the national debt; bankruptcy reform makes it impossible to escape your debts; in Darfur, people earn $1.25 a day. Bull? I'm not sure.:smack:
Also another link.Here

Well, there's a lot of stuff that I'm not allowed to tell you ...

But it has to do with Alan Greenspan, a deal with the Dark Overlords™, and the sacrifice of a virgin goat of a particular color.

Assuming the currency value is permitted to run free (which is not the case in Hong Kong, Argentina, Iraq, and some other economies), then the currency value is how an economy is rewarded for strong economic parameters AND punished for doing bad things such as money games.

For example, if the government prints too much money, runs excessive deficiets, issues lots of bonds today to make the economy look prosperous, etc, then the currency markets (eventually) punish that economy by lowering currency value.

If the economy shows fiscal restraint, increases productivity (innovates with the products and not with the finance), etc, then world markets upgrade the currency value.

Political types may make the economy look good today by issuing tax cuts, spending money by running up government and trade deficiets, selling Treasury bonds to other nations, etc. This can make the economy look good for those few years. But then the currency markets reap their revenge many years later by devaluing the currency. There is no free money. If the economy does not practice responsible financial activity, then the currency markets take revenge.

IOW the economy gets punished because suddenly the people's standards of living are sharply devalued along with the money. IOW the inflationary pressures that were always there, but were masked by government money games, are then released as world currency markets punish by lowering the currency value.

What example would you prefer to better understand these principles?

Thank you all for your comments and explainations.


A co-worker complained in a conversation a while ago something like..."it's ridiculous that the people in countries other than the US (or other countries with higher valued currency) should have to work such a long period of time to earn the money required to pay for common, low cost items that we here in the US find easily affordable".

Having visited a third world country just recently, I laughed out loud hearing this. Not because I dont have empathy for those people that have to pay those high exchange rates, but for the reality that I've seen the differences between a developed country and an undeveloped one.

Being physically within a system or country allows you to see and understand why the various currencies would be valued differently. In this case though, I was unable to effectively explain why this is true to this person.

Thanks all for your common sensical explainations. Special thanks to TW who has managed to keep the Bush admin out of the comment while giving a pretty good short background on the question. I know this is a hard thing for you to do TW.

Much appreciated.

A simple example maybe found in The Economist's Big Mac Index Their latest survey as of 9 Jun 2005: