So, this is Bob.

He lives in America, where he uses the US dollar almost every day.

Now he wants to travel to Germany, which uses the Euro as its currency.

But when Bob tries to exchange his money, he finds that one US dollar is equal to 90 cents Euro.

Then Bob goes to Vietnam, where one US dollar is equal to 25,000 dong.

Wait!

Hold on!

Why does money have different values?

Why isn't one US dollar equal to one Euro and one Dong?

And why do exchange rates keep changing every second?

In this video, we're going to dive into the world of currencies, exchange rates, and why money isn't just… equal.

Before we talk about the reasons behind different currency values, let's first cover a short history of currency.

For a long time, money was directly linked to precious metals like gold.

This was known as the gold standard.

Under the gold standard, a country's currency was backed by a certain amount of gold.

For example, the US dollar was once tied to a fixed amount of gold.

This helped keep exchange rates stable because a country couldn't just print more money without having more gold.

It stopped governments from printing too much money.

But as economies grew and global trade expanded, countries started moving away from the gold standard.

It was getting harder to keep enough gold to back every unit of currency, especially during wars and crises.

By the 1970s, most countries had switched to a new system called fiat money.

Fiat money is currency that has value because the government says it does, and people believe it.

It's not backed by any physical asset like gold.

That's why some people call it fake money.

If you want to learn more about this, let me know in the comment section and I can make another video for it.

As fiat money has no physical value like gold, its value depends on whether people still want it or not.

If many people want the money, they will compete to get it, making the value of the of fiat money comes from supply and demand.

That's why the currency of strong economies like the US dollar is higher in value because more people want it.

Meanwhile, the currency of weaker economies, like Venezuela, which had hyperinflation, is much lower because nobody, not even Venezuelans, wants it.

So, in this video, we will look at how supply and demand affect the value of money.

Section 1.

Inflation So, inflation is when the currency starts losing its value.

Simply said, it's where there's more money compared to the amount of product and service.

You can watch my video about why don't we just print more money to understand more about this.

So, when a country has high inflation, its currency's value will decrease.

Why?

Because nobody wants to buy and hold a currency that is losing value.

For example, in 2022, you can buy two loaves of bread for $10.

But due to high inflation, two years later in 2024, you can just buy a loaf of bread for $10.

So, you buy fewer things with same amount of money.

A real-life example is Zimbabwe.

In the 1980s, the Zimbabwean dollar was worth more than the US dollar.

One Zimbabwean dollar was equal to 1.35 US dollars.

But due to their failed land reform, economic problems, corruption, international sanctions, and printing money mindlessly, the value of the Zimbabwean dollar dropped dramatically.

By the 2000s, one US dollar was equal to almost 600,000 Zimbabwean dollars.

The government tried to fix it by changing the currency several times, but in the end, they gave up and started using more stable foreign currencies like the US dollar and the South African rand.

Even though the latest news is Zimbabwe trying to get back their original currency.

So, plus one point for never giving up to Zimbabwe.

Section 2.

Interest Rate You might have heard about interest rates before and wondered why they matter so much.

Interest rates are the cost of borrowing money in percent.

If you borrow $1,000 at a 10% interest rate, you have to pay back $1,000 plus an extra $100 as interest.

Central banks, like the Federal Reserve in the US, set interest rates in their countries.

When a country has high interest rates, it offers better returns on investments, attracting foreign investors.

These investors need to buy that country's currency to invest, which increases demand and strengthens the currency.

For example, you want to invest in government bonds.

Government bonds are when you lend your money to the government for a set period of time, then the government will return your money with the interest.

Let's say you buy a governmental bond for $1,000 with 5% interest for 10 years.

It means the government borrows your $1,000 and will pay you 5% interest on $1,000, which is $50 every year for 10 years.

So the logic is, the higher the interest rate, higher the return of investment.

So, if the interest rate in the US is higher than in Germany, investors might sell their euros and buy US dollars to invest in American bonds or savings accounts with higher returns.

This increased demand for US dollars strengthens the currency.

On the other hand, if US interest rates are falling, it offers lower returns, and investors might look elsewhere.

This reduces demand for US dollar, causing its value to decrease.

But a country cannot just make its interest rates as high as possible to attract investors.

Why?

Remember, interest is the cost of borrowing money.

High interest rates also mean it becomes more expensive for people and businesses in that country to borrow money.

If borrowing becomes expensive, fewer people buy homes or start businesses.

This can slow the economy and lead to unemployment.

So the central bank needs to increase and decrease the interest rate based on the country's situation.

And that's why everyone is afraid of this guy when he announces the US dollar.

Section 3.

Country Situation and Foreign Investment When China opened up its market in the late 1970s to foreign investors, lots of foreign companies started to open their business in China.

If they wanted to open factories in China, of course they needed Chinese currency which is Yuan or Renminbi to buy the land, build the factories, pay the workers and other expenses.

So it just makes more demand for Chinese Yuan and make the Yuan value stronger and give China lots of money.

That's why almost all countries promote their countries to foreign investors and lure them to invest and do business in their countries.

But foreign investors won't just invest in any country.

They look for countries with stable politics and economies.

Why?

A stable government means consistent rules and laws for businesses.

For example, if a country promises low taxes to attract foreign businesses but then suddenly raises taxes, it becomes more expensive for those businesses.

They could lose money.

If a country keeps changing its rules, businesses won't feel safe investing there.

Similarly, if there are lots of protests or strikes, it can disrupt production and make it hard for businesses to operate smoothly.

A stable economy is also important because it means the country's money is less likely to lose value suddenly.

If a country has a lot of debt, high inflation or frequent economic problems, foreign investors worry they might lose money.

So a stable country is more attractive for investment, which helps keep its currency strong.

Section 4.

Export and Import When Japan exports cars to other countries, those countries need to use Japanese Yen to buy the cars.

This makes the Yen high in demand.

If Japan imports coal from Australia, they need to use Australian dollars to buy the coal, which increases demand for the Australian dollar.

Most countries try to export more so that others need to buy their currency, making it stronger.

For example, when the U.S. convinced oil-producing countries like Saudi Arabia to sell oil only in U.S. dollars, it made the U.S. dollar highly in demand.

Since almost all countries need oil, they have to get U.S. dollars to buy it.

This made the U.S. dollar a global currency, strengthening the U.S. economy and influence as the number one in the world.

This is known as the petrodollar.

Even though there's rumor that Saudi try to accept other currencies also.

I can also make another video about it if you want.

On the other hand, small island nations in the Pacific, like Tuvalu, don't have much to export so their local currencies aren't widely used.

Instead, they use stronger currencies like the U.S. dollar or Australian dollar to make trade easier.

Section 5.

Fixed Value So if you want your country to get stable and strong currency and also doesn't want to be hassle about it, then just use this trick.

Just peg your currency to other currency of stronger and stable countries.

For example, Brunei, an oil-rich small sultanate in Southeast Asia, pegged their currency one to one to Singapore dollar.

So it means both currencies have exactly same value, and that's why you also can use Singapore dollar in Brunei and vice versa.

Another example is Belize, a small country next to Mexico, which pegs its currency, the Belize dollar, to the U.S. dollar.

They set the rate so that one Belize dollar is always equal to half a U.S. dollar.

So if you want to change your U.S. dollar to Belize dollar, you don't need to see the exchange rate, just double the amount.

It's so easy, isn't it?

Pegging a currency makes it stable and easy to manage, but the country becomes very dependent on the stronger country's economy.

If the U.S. dollar falls, the Belize dollar will fall too.

So if one currency lives, the other live.

If one dies, the other dies.

So, these are some reasons why currencies have different values.

Your next question might be, why don't all countries use the same currency, like a world dollar, so we don't need exchange rates and all these hassles?

Well, it sounds like a great idea, but it's not that simple.

Let's look at the Euro as an example.

It's very convenient for people living in the Eurozone, because they can travel across countries without needing to exchange their money.

But the challenge is that every country has to give up control over its own money to the European Central Bank.

This means a country cannot change its monetary policy just to fix its own problems, because it could also affect other countries.

For example, when Greece had a financial crisis in 2009, the effects spread to other Eurozone countries.

And that's why Germany is not so happy with Greece about this.

So, if all countries in the world decided to use a single currency, it would be very risky.

Imagine living your best life, but then facing inflation and a crisis just because a country thousands of miles away messes up its economy.

One country's problem would become a problem for the whole world.

And maybe your next question is, should we make our currency as strong as possible?

The answer is, not really.

As you know that different countries have needs.

For example, a country that imports a lot, like Singapore, may want a strong currency to make imports cheaper.

While a country that exports a lot, like China, may want a weaker currency to make its products cheaper for other countries.

That's why China has been accused of purposely lowering its currency's value, called currency devaluation.

How does this work?

I'll explain it in another video.

If you want me to make other videos explaining these topics, please like and subscribe.

Thanks for watching.