There is two neighboring country/nation/sovereign area, X and Y.
X has a paper money unit/currency cX and Y has cY for that.
A person of X wants to purchase some good from Y. He does the following to achieve that,
He buys some good gX in X with a certain amount of currency cX , that he had in his possession, assuming gX has a demand in Y.
He then travels to border of Y and sells that good to another person of Y.
He gets certain amount of currency cY by the sell of gX.
Then he buys his desired good gY with that earned currency of cY from another person of Y and consumes the good gY which satisfies his desire.
He was needed to spend total mX amount of currency cX to purchase gX good.
He sells all of the gX good and earns mY amount of currency cY.
He buys good gY with all that mY amount of currency cY and feels content with the consumption of it.
Can we call here that the exchange ratio of cY and cX in X is mY/mX?
Now, we can assume there is a foreign exchange marketplace from where that person of X can exchange his mX amount of currency cX with mY amount of currency of cY instead of physically travelling to border of Y and selling some good to earn cY.
But again, if that foreign exchange marketplace claims a certain 0.01 or 1000 as the exachange rate of mY with mX, what does that mean? Even if the rate jumps from 0.01 to 1000, it will not make any major impact on the person of X in terms of purchasing good from Y if Y is in state of inflation.
The point of whole example is to contend that foreign exchange rate is just a number, nothing more than that (unless this view is already accepted by economists!). It reveals nothing about the rate of exchange between two countries.
If you consider prices as just numbers then your logic makes some sense. Otherwise currency exchange rates are much more than just numbers.
In my view and the view of many other users of this web site: Exchange rates are prices. Prices provide consumers information about the relative scarcities of items they demand. The exchange rates you mention are simply prices on converting one currency into another. These rates are critical to consumers of currency who travel between currency jurisdictions and to consumers of currency who intend to buy and sell things in multiple currency jurisdictions.
You’ve gone 'way over my dumb-cluck head with this one. That’s why I stay out of speculation in fiat currency. My brain spins uncontrollably attempting to put sense or reason in counterfeit “money”, which is all fiat currencies amount to. But even the use of gold and/or silver bullion or coin presumes an illusionary “value”, and will vary depending upon how much I desire the product or service at the time.
Like many, when I travel abroad I never feel quite comfortable with the unfamiliar local units of exchange for a time. Basic transactions such as hotels, restaurants and taxi’s make me wonder who’s screwing whom.
The only thing one can buy, sell or trade upon is energy. Man’s physical and his or her mental energy. Think about it. No matter where you are (man-made fictitious lines in the sand called borders have nothing to do with it), if you look around your house you will find stuff. Each of the items (stuff) represents something you purchased at one time or another (unless you stole or received as a gift) for a certain number of fiat “units of exchange” you received from customers and/or employers who rewarded your energy and/or ingenuity for said units.
And all the stuff will eventually end up back in the ground where they came from. As will you. They were then and are now meaningless numbers – illusions of value. The oak desk upon which I’m typing would probably cost say 500 federal reserve notes today down at the local furniture store. If I expend a great deal of energy chasing all over town I might find a similar desk for 450 frn’s or less. But if I were moving and didn’t want to pack the blamed thing I might be happy to take 250 or 300 frn’s today (“make me an offer”) and move my computer to the kitchen table. I have no idea what it’s worth in euros or “new” pesos or “old” pesos, etc.
So “foreign exchange marketplaces” are based upon the faith of the user.
Exchange rates are surely prices because these are exchanges of commodities where all the involved commodities are currencies of some country/jurisdiction. And prices are indicative of willingness to acquire goods, considering concept of marginal utility. Hence they are not just numbers, as my previous writing may have falsely suggested, but more than that. But i was wondering to see from the point of view a country/jurisdiction. Let me rephrase the question as below, -
Assume the people of a country X used to convert their currency cX with currency cY of another country Y through a foreign exchange marketplace. They used to get 1 cY for 100 cX. Now, after one year, they gets 1000 cY for 1 cX. The rate almost got reversed. Does that mean cX, the currency of country X, got stronger with respect to cY? Or is there an increase of feduciary/fiat money in country Y? Or did cY, the currency of country Y, get weaker due to lack of economic activity?
In other words, does the change of foreign exchange rate indicate anything about the amount of exchange of non-monetary goods between two countries?
Hi. The idea that we are buying and selling human energy and ingenuity sounds to me like the infamous Labor theory of value. Plenty of rebuttals of that on this site.
A “Labor Theory of Value” makes absolutely no difference. Nor does any OTHER “theory of value”.
The original poster had good points – but it is all a matter of number manipulation no matter how you try to calculate it. When I travel abroad I have initial difficulty transacting business because I’m just like all typical sheep: unaccustomed to the currency maneuvering there as opposed to here. Few stop to consider the basic evil of state employees having any input into “money” or “exchange rates” at all, let alone the corrupt practice of forcing fiat currencies upon the shapeless masses in the conquest to control all production. The eventual rise of central and “federal reserve” banks was the natural result of that basic immorality.
I think it’s virtually impossible for most posters to grapple with the idea that employees of state had no legitimate right to acquire “the power to coin money” in the first place. For most “educated in economics” the very thought sets up what’s being called cognitive dissonance.
“…When government begins providing services formerly provided non-politically, people soon forget that the services were ever provided non-politically and assume that only government can provide them…” ~Carl Watner
Keep in mind that prices are not related to costs. Prices come from valuations based upon past prices and on future events. So everything from weather, seismic events, politics, cultural changes, technological changes, etc could affect the price of a currency. A great example of this is the change in the number of US Dollars it takes to purchase one Brazillian Real. When the current president was elected in Brazil the world thought he was a hard core socialist so the number of dollars to purchase one Real dropped. But in office the president was more contained than his rhetoric so the exchange rates came back into line in several months after the election.
"Prices come from valuations based upon past prices and on future events. So everything from weather, seismic events, politics, cultural changes, technological changes, etc could affect the price of a currency. " - this is really an eye opener.
Then i guess, increase of foreign exchange rate can be thought to be indicative of following phenomena,
increase of demand and/or decrease of supply of foreign goods
increase of expectation of such change of demand and supply
inflation of domestic currency and/or deflation of foreign currency
