Currency – Determination of world economy

by | Nov 9, 2011 | Money & Finance

An economy’s currency reflects the physical characteristic of a nation’s money supply in the form of coins and banknotes. Currency is largely known as “Forex” which is the abbreviated form of Foreign Exchange. Every country has its own currency with the exception of Europe wherein the euro is used as the currency for several European countries.

A currency can be used as a medium of exchange to facilitate more trade in the economy as it is acceptable as payment for goods and services. A currency can be used as a unit of account to measure the market value or cost of goods, services, or assets. This in turn helps in having a better understanding of profits, losses, prices and costs. A currency is also a store of value as it can dependably saved, stored and recovered and continues to be used as a medium of exchange.

Currencies are mostly used for in Forex trading which is conducted in currency pairs wherein the currency of one country is traded for that of another. Most currency pairs are traded against the US Dollar as it is the world’s reserve currency. Currencies are traded on the foreign exchange market, which is one of the most heavily traded markets in the world. A foreign exchange market aids businesses to convert one currency to another which in turn helps international trade and investment.

A foreign currency exchange market facilitates buying and selling of currencies from different countries. However, some currencies have fixed rates, like the Chinese yuan which has a fixed exchange rate determined by their central bank. Some currencies have fluctuating rates like the U.S. dollar which is based on market demand and supply.

The exchange rate of a currency is valued by comparing it to another currency wherein the first currency of a currency pair is called the “base currency”, while the second currency is the “quote currency”. The currency pair indicates the amount of the quote currency that is required to purchase one unit of the base currency.

The exchange rates enable assessing the economic stability of a country. A currency with a higher is assumed to among the stronger currencies of the world. When the currency exchange rate of a country drops sharply against another currency of another country, it indicates a weakening economy and thus helps the government to take steps to offset the situation.

In most countries, the central bank, also called the monetary authority of the country or a Ministry of Finance manages the supply and production of its own currency. A monetary authority is a regulatory body which controls the demand and supply of money in the economy by way of its monetary policy.

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