INTRODUCTION TO CURRENCY-
As we all know before the currency system there was a barter system, Where goods were exchanged for each other. for example: a farmer would exchange Wheat grown on his farmland with cotton with another farmer. These systems had difficulties to run and optimize because of the non-divisibility of certain goods, costs in transporting such goods for trading, and difficulty in valuing services.
In a barter system, there are multiple problems that two parties face during a transaction. for example: How does a dairy farmer exchange his cattle for a few liters of edible oil or one kilogram of salt?
now, we understand that the farmer has no way to divide the cattle, similarly, suppose wheat is grown in one part of the country and sugar in another part of the country, the farmer has to travel a long distance every time he has to exchange wheat for sugar.
Therefore, these criteria and upcoming inequality resulted in the medium of exchange for the innovation of money, in the form of currencies where we know that money is he storehold of wealth that can be further exchanged for any goods and services.
ALTERNATIVE OF CURRENCY –
Well, people tried multiple different commodities as the medium of exchange ranging from food items to metals, gradually metals became the more prominent medium of exchange, because of their ease of transportation, divisibility, certainty of quality, and universal acceptance.
People started using metal coins as a medium of exchange which further progressed into the development of paper currency, people would deposit gold, and silver coins with banks and get a paper promising, that at a certain time, the value of paper would be equivalent to the gold coins. “THIS IS HOW THE SYSTEM OF BOOK-ENTRY OF COINS AGAINST PAPER WAS THE START OF PAPER CURRENCY”
with time, countries started trading across borders as they realized that everything could not be produced in each country or when people observed that the cost of production of certain goods was cheap in certain countries.
This led to the rise of foreign exchange internationally (FX), which represents the value of one currency in one country versus the currency of another country, each country has its own brand alongside its flag.
We all know that when money (a storehold of wealth ) is branded is called currency. So whenever there is a cross-border trade then there will be a need to exchange one brand of money for another which gives more enhancement for exchange to two different currencies which is known as foreign exchange or “simply Forex”.
VALUATION OF CURRENCY:-
for smooth functioning of any internal or international trade among countries led to the valuation of one country’s currency vs another.
The central banks issued paper currencies and must hold an equivalent amount of gold in their reserve, the value of each currency against another currency was derived from the gold exchange rate, let me help you here.
One unit of gold is valued at Indian rupee (INR) 10,000 and USD 500 then the exchange rate of INR vs USD = rs.20, let us understand it with more clear distinctions –
E.g.: 1 ounce ( 28.3g) of gold in USD is $ 2650/ ounce and at Indian rupee (INR) Rs.2,17,174 / ounce-
So the INR vs USD or INR/USD = 2,17,174/2650 = Rs. 81.952.
These valuations change with the change in microeconomic and Monetary policy conditions like money printing, Foreign institutional investors selling their stakes, Too much consumption of foreign goods and services ( imports ), and a country’s low production ( less export ), and government spending.
DEVALUATION OF CURRENCY!
Whenever we observe rate cuts we know their impacts on markets especially on money printing, The more the money printing the more the currency devaluation we will observe the increase in labor rates.
This is because money printing devalues our currency and then countries that have more valuation with our currency start purchasing our products or services which will raise our labor increment but for just short term!