What is Currency?
A currency is the system of money circulation or money in common use followed in a country, particularly for people in a nation. Money can be used as a medium of exchange in any form, particularly circulating banknotes, cash and coins. Each country possesses its own value of currency since there are different types of currencies which are used in different countries. For example Indian currency is represented in Rupees (Rs, INR). Now let's explore the currency system in different countries and thus how currency converters work.
Examples and Symbols of Currency
Different countries use their own currency value and symbol. That said, we have brought you some of the most popular currencies of the world as per trade and commerce.
Currency Conversion
Let’s say, your plan to visit a foreign country, or you are purchasing something online from another country. You will see that the price of the item will be marked in a different currency, which will be not be same as your country's currency and you’ll want to be able to figure out how much the product costs in your own currency so that you can get the final price you have to pay and thus make a decision if or not to buy the item.
Having said that, let’s consider an example. If you want to buy perfume from any online site in China. The cost of perfume is 60Yuan. How much does the perfume cost in dollars? Now in order to find the value of perfume in dollars, you would require knowing the conversion value of Yuan to dollars. The table given below depicts you different values of currencies in comparison to a US Dollar (USD).
Exchange Currency Rate
An exchange rate is basically how much it costs to exchange one currency from another. As currencies across the world are consistently being traded (bought and sold), the exchange rate is inclined to change from week to week.
Let’s say if the USD (US dollar) to CAD (Canadian American Dollar) exchange rate is 1.0950, it implies that it costs 1.0950 CAD for 1 USD. The 1st currency listed always stands as 1 unit of that currency while the exchange rate shows how much the 2nd currency (CAD) is required to buy 1 unit of the 1st currency (USD).
Exchange Rate Example
Let’s do some currency conversion. For that, we will use our currency converter. So, in order to change Thai Baht to the foreign currency, you will need to multiply the amount in Baht by the exchange rate. Thus,
Foreign currency = Thai Baht x Exchange rate
For example:
Sarah is going to the US and changes 80 000 Baht to USD. How much USD does she get?
1 Baht = 0.027778USD
Therefore, 80 000 Baht → 80 000 x 0.027778 = USD 2222.24
Solved Examples Using Currency Converter
Example:
Alice sees a pair of shoes for sale on a cruise ship for €70. Then, she finds the same shoe online for £55. She wants to buy the product paying the cheapest price possible. On that day the exchange rate is £1 = €1.25. Where should Alice buy the shoe from?
Solution:
For this problem, we can either convert from £ to € or from € to £.
Now, let’s convert from £ to € and we get:
£55 × 1.25 = € 68.75
Alice should buy the shoe on the ship.
Converting from € to £:
€70 ÷ 1.25 = £56
Alice should buy the shoe on the ship.
Fun Facts
The symbol of Indian Rupee was accepted by the India Government on 15th July 2010.
The Indian Rupee sign symbol is a depiction of Indian ideology.
Dollar currency name withholds more than 20 countries
The Indian Rupee symbol imparts a unique identity to the Indian currency that helps to distinguish it from similar currencies of other nations such as Indonesia, Pakistan, and Sri Lanka.
FAQs on Currency: Types, Functions, and Global Importance
1. What is currency and why is it important in an economy?
Currency is a system of money, such as banknotes and coins, that is in common use within a specific country. It is issued by a government and accepted at its face value for transactions. Its primary importance is that it serves as a universally accepted medium of exchange, which eliminates the inefficiencies of a barter system and simplifies trade, investment, and economic measurement.
2. What are the primary functions of currency?
In economics, currency performs four essential functions that enable complex financial activities:
- Medium of Exchange: It is used to pay for goods and services, avoiding the need to trade items directly.
- Unit of Account: It provides a common measure of value, allowing the prices of different items to be easily compared.
- Store of Value: It can be saved and used for future purchases, retaining its value over time (though this can be affected by inflation).
- Standard of Deferred Payment: It enables the creation of debt, allowing for contracts and loans to be settled at a future date.
3. What are the different types of currency?
Currencies are generally classified based on the source of their value. The main types include:
- Commodity Money: An object that has intrinsic value on its own, such as gold, silver, or salt in ancient times.
- Fiat Money: Government-issued currency that is not backed by a physical commodity. Its value comes from the trust in the issuing government. The Indian Rupee (INR) and US Dollar (USD) are prime examples.
- Representative Money: A certificate or token that represents a claim on a commodity, such as a gold certificate.
- Digital Currency: An electronic form of money, like cryptocurrency (e.g., Bitcoin) or central bank digital currencies (CBDCs), that exists only in digital form.
4. How does currency differ from money?
While often used interchangeably, money is a broad concept referring to anything that functions as a medium of exchange, a store of value, and a unit of account. Currency is a specific, tangible form of money, namely the physical paper notes and metal coins issued by a government. Therefore, all currency is money, but not all money is currency. For example, the balance in your bank account is money, but it is not physical currency until you withdraw it as cash.
5. What determines the global importance of a currency like the US Dollar?
A currency's global importance is determined by several factors beyond just its country's economic size. The key factors include:
- Reserve Status: Its widespread use by other nations' central banks as a reserve currency for international trade and investment.
- Economic and Political Stability: Confidence in the long-term stability of the issuing country's economy and government.
- Deep Financial Markets: The existence of large, open, and liquid financial markets where assets denominated in that currency can be easily bought and sold.
- Network Effects: The more a currency is used for trade and finance globally, the more convenient and entrenched it becomes.
6. Why can't a country simply print more currency to become rich?
Printing more currency does not create more economic value; only the production of goods and services does. If a government prints excessive amounts of money without a corresponding increase in economic output, it leads to hyperinflation. With more money chasing the same amount of goods, prices rise sharply, the currency loses its value, savings are wiped out, and the economy becomes unstable. This ultimately makes a country poorer, not richer.
7. What is the difference between fiat money and commodity money?
The fundamental difference is the basis of their value. Commodity money has intrinsic value, meaning it is valuable for its own sake (e.g., gold can be used in jewellery). In contrast, fiat money has no intrinsic value. Its value is established by government decree or "fiat" and is maintained by the public's collective trust and acceptance of it as a medium of exchange.
8. How has the rise of digital currencies impacted the traditional concept of currency?
Digital currencies, especially decentralized cryptocurrencies like Bitcoin, challenge the traditional concept of currency in two main ways. Firstly, they operate without a central issuing authority like a government or central bank, which is a defining feature of traditional fiat currency. Secondly, they introduce a new method of transaction verification through decentralized ledgers (blockchain), questioning the need for traditional financial intermediaries. While still volatile, they have spurred a global conversation about the future of money and central banking.
