How a countries curriency has an exchange value with that of another?

Answer 1

Of course this is to do with supply and demand of each currencies, but their intrinsic exchange values are to do with with the effective purchasing powers of the currencies.

i.e: one euro (€) allows to buy 2 cans of Coca-Cola in a supermarket and we need 10 reminbi in China to buy these cans, it is likely that the exchange rate will be close to 1€ =10 RMB

+ you have to add the inflation effect of the currency, so the general rise in (nominal) prices measured against a standard level of purchasing power. if one euro allows to buy 2 cans today, it is possible than in 5 years you will need 1,3 euros... while you will still need 10 RMB.

+ cost of living in the countries, price of a selection of goods purchased by a "typical consumer" is different in Iceland and in Congo, this is measured by consumer prices indexes

Hope this helps

Answer 2

Money is a mode of exchange used to easily facilitate the exchange of goods. The Govt decides the amount to mint based on the productivity of the entire nation.Based on the same it trades with other countries as well. Thus the currency value in exhange should be common.In internation market its currently as dollars,euros or even gold. But the point remains the same.its a medium of exhange. hence when the value of the Currency changes it effects the demand and supply which will cause the cycle to shift to equilibrium.
This can best be visualized in Old barter system .
If Oil is produced less and more no of people produce rice ..then isnt that you will get more Rice for exchange with oil ?
In barter there were many relationships to established for fair communication. Money /paper or face value thus gives this evaluation in simplified terms.

Answer 3

Currencies used to have a fixed rate under the International Monetary Fund, but in the late 1970's this system collapsed and was replaced with a 'floating' exchange rate system.

The US dollar is the principal currency of comparison, each nations currency is weighted according to the US and the value of, say, the British Pound (GBP) is an equilibrium between demand (particularly from abroad) and the supply of that currency.

The higher the demand for a currency, the higher the equilibrium price and the price at which such currency is then sold.

Answer 4

Basic wealth of every country is determined on a common norm or yardstick, by international agencies, and, that authentic value is used for comparison, which, in turn, makes it possible to evaluate every country's currency against other countries', for exchange purposes! Economists, therefore, talk of GDP, Per-Capita (Income), Inflationary trend, Growth etc. in relation to every country, in assessing the wealth and growth!

Answer 5

The exchange values are based on the wealth of the nation, GDP, Per capita income and the transactions with World bank, etc.,

Answer 6

Stock exchange