What are Currency Exchange Rates and Why do they Keep on Changing?

Economics – and anything remotely related to it – has always seemed to me like something that I ‘just don’t’ and ‘just won’t’ understand – and therefore, I just accepted it. I experienced it as a ‘big scary monster’ that I should try to steer away from as much as possible – and that’s exactly what I did. Consequently, I remained unaware of the mechanics of the economic system and interacted with it on a strictly ‘need-to-know’ basis.

And so – for instance – up until a few days, I had actually no clue of what ‘currency exchange rates’ are. As most people, I’m aware of how they play a role in calculating the value of a good or service from one currency to another – or how, when I go abroad and require cash in a different currency, the amount of foreign currency I receive, will be calculated according to these currency exchange rates. But – what they actually are and why they keep on changing: nope, no idea.

So – what are currency exchange rates? To answer that question – we first require to have a closer look at international trade – meaning: imports and exports.

As you are probably aware, not all products that are consumed within a certain country, are necessarily produced within that country. To gain access to goods and services that are not available – or not cheaply available – within the borders of one’s own country, products are imported from abroad.

As with any product being sold on a market – an exchange takes place. We exchange money for goods and services – and the same applies to imports (goods imported from abroad). Now, how does this work. Let’s illustrate it with a fictional example: when corn is imported from South Africa to Belgium, Belgium – or someone in Belgium – will require to pay for this corn in South African Rands. To be able to do that, the buyer will need to acquire South African Rands, because Euros are not a valid means of exchange in South Africa. And – like most things in this world: South African Rands can be acquired, through paying for them.

Indeed – what happens whenever one wishes to purchase goods from a country where your currency is not valid – is that you first have to buy the other country’s money, so that you’re able to use that money to make payments in the other country.

In the example of a Belgian buying corn from South Africa: The Belgian will first require to buy South African Rands with his Euros. Only once he has bought the South African Rands, can he proceed with purchasing the corn in South Africa.

‘Naturally’ – when we’re on holiday and we buy an ice-cream using our credit card, for instance, we don’t experience it as though we first buy foreign money and then, with the foreign currency, buy our ice-cream – both transactions, the exchange of currencies and the purchase of the ice-cream, happen simultaneously. However, it is important to understand that the exchange of one currency to another operates according to the same principles as any other purchase in the ‘free market’ economy. Currencies are goods that that are bought and sold – so, an exchange rate is really nothing else but the ‘price’ of a particular currency, expressed in a different currency. That wasn’t too bad, now, was it?

Now – the second question: why do exchange rates change all the time?

The answer to this question is implied within the answer to the question of what an exchange rate is: it is a price – and as such, it is subject to the two major ‘forces’ in the ‘free’ market economy, namely: supply and demand.

So – let us have a brief look at what is referred to by ‘supply’ and ‘demand’ and how those two act as ‘forces’ that influence prices. Again, I’ll illustrate with a fictional example:

Let’s say that on the market of apples, there are 5 available apples, but there are 10 people who each want to buy an apple. We say that 5 apples are supplied and 10 apples are demanded. How, within the ‘free’ market economy, is it determined who gets an apple and who doesn’t? Through the price of the apple. What is done in a situation where the quantity demanded exceeds the quantity supplied, is – the price is adjusted in such a way that the quantity demanded drops and becomes equal to the quantity supplied. In apple-terms: There are 5 apples supplied (quantity supplied) and 10 apples demanded (quantity demanded) – what the seller/supplier will do, is adjust the price in such a way that only 5 apples are demanded – thereby equalising the quantity of apples demanded (from 10 to 5 apples) to the quantity supplied (5 apples). (If you have to read the above paragraph a few times to understand it clearly: do so.)

How will the price be adjusted to drop the quantity demanded? The price will be raised. Why? Because the general rule is that at a lower price, the quantity demanded increases and at a high price, the quantity demanded decreases. You can relate this to your own experiences: when something is cheap, you’ll be inclined to buy more of it than when it is expensive. For instance, when there are sales on clothes, you may come home with 5 full bags of newly purchased clothes when, usually, you would maybe only buy a few items at a time. So, when 10 apples are demanded and 5 apples are supplied, the supplier will increase the price of an apple, until only 5 people are left who are willing to pay the higher price.

Logically – if 10 apples are supplied but only 5 apples are demanded, the opposite will happen. A supplier wants to sell all of his 10 apples. So – to get more people to be willing to buy his apples, he will lower the price of an apple, until 10 people are willing to pay the lower price. Again, herein equalising the quantity demanded (from 5 to 10 apples) to the quantity supplied (10 apples).

So – now you understand the principles of supply and demand and how they influence prices.

Since a currency exchange rate is nothing more than the price of a certain currency, exchange rates are subject to supply and demand as well – and that is why currency exchange rates change all the time; due to changes in the quantity demanded and the quantity supplied.

In our example:

The more foreign countries want to import corn from South Africa, the higher the quantity of South African Rands demanded (remember, they first have to buy the currency before they can pay for the corn with it), the more the price of South African Rands – or the exchange rate – will rise.

The less foreign countries want to import corn from South Africa, the lower the quantity of South African Rands demanded, the more the price of South African Rands – or the exchange rate – will fall.

There – doesn’t that make economy look a whole lot less scary already?

If you’re not satisfied with the current economic system and the consequence of it within the world, it is important to investigate how it works and to stand equal and one with those that are currently running the show. The first step herein is to educate ourselves on how the system operates and how they’re manipulating it to suit their needs. Even if economy seems like a big, scary monster: it’s not – it’s just another system.

Only the Poor would Survive

I’ve been raised in the belief that in order to survive, I need to have a good education, so that I can get a good job, a lot of money and from there I’ll be able to take care of myself.
Having moved to South Africa, this belief of mine has been challenged.
In coming to live on a farm, I quickly realised that all the knowledge I gathered over the years through schooling, had become completely useless – none of it was able to be applied or used in this new environment. I had to learn how to do everything as though I had never done anything my whole life.
All that I was able to do, was limited by that which I had learnt and studied in school. Anything outside of that was ‘unknown territory’ and I believed that it was ‘not for me’ because I hadn’t prepared myself through schooling/education to participate in that.
In my stay on the farm and in South Africa, I have met several people who have done a whole range of things during their life and who seem to be able to take on any challenge, no matter in which ‘field’ or of what ‘type’. This is in sharp contrast to the (adult) people I knew in Belgium: they had a stable job, which they had been doing for years and which they would probably continue doing for years. They had studied to ‘become something’, then they became it and then they simply remained as it. They have one profession and that’s it – one profession that requires a certain kill-set. Anything outside of this profession and skill-set, is ‘unknown territory’ and should be taken on by people who have educated themselves/ specialised in different fields, professions or skill-sets.
What I see here, is that the overall economic situation in Belgium is simply ‘more stable’ than in South Africa. In Belgium, you can afford to study just one profession and remain as it, because you’ll probably be able to keep that particular job for a very long time. In South Africa, however, the economic situation is not as stable and one requires to continuously look out for new opportunities or jobs in order to generate an income. Here one requires to adapt to the environment. “These are the available jobs/opportunities at this time: either adapt yourself to these jobs/opportunities, or suffer.”
Therefore, in general, people here are better at adapting themselves to change and if ever world war III breaks out, or a world-disaster occurs – it is those people who will be able to survive – as they will simply adapt to the situation and become whoever they require to become – not defined by any education or studies. Whereas, in a country like Belgium, people are so used to everything remaining the same, that if a war breaks out or a world-disaster occurs, they won’t know what hit them and they will literally be like fish on the land – because they didn’t ‘design themselves’ to adapt to change effectively.
And so, again, all is in reverse. Those countries with high levels and standards of education believe their population to be superior to countries with low levels and standards in education. But the result is that if you train yourself really well and really long in one thing, you are excluding yourself from everything else. In terms of living-skills and survival-skills – you’re useless if you cannot adapt to change. It is those who live in countries where the economic situation is unstable and the education standards are low – who are superior human beings.
Within designing a new, Equal, Money system – we require to re-design our education systems as well – because, you won’t require to study really hard to become very good at one profession, to get a ‘good job’, to have a lot of money in order to survive. Money will be here, will be provided unconditionally.
Education should train a person in a wide variety of skills. In school, I chose to study Latin-maths – and the only ‘skill’ I learnt here, was to study something by heart. In other studies, one learnt how to cook, in another one learnt how to work with engines and so on. Why are those classes not available to everyone? And why are all classes where someone requires to make their hands dirty, seen as ‘less’ and ‘for dumb people’?? With all my knowledge, I wasn’t able to do anything when it came to practical living!
If money and income don’t determine the value of a certain job, profession or skill-set anymore – people will actually be willing to develop all kinds of skills, whereby we are no longer limited and completely dependant on others to ‘get things done’. Each one can then explore themselves into various different applications, fields, skills and professions. Herein, the focus of education will shift from survival to life. Education should not exist for the purpose of survival – survival should be a given – education should focus on life and how to live effectively.
Currently – with all the education in place – still no-one knows how to live. How to live is not something that you learn in school, it’s something you have to apparently ‘figure out’ in your ‘spare time’. If education were to actually focus on Life and not Survival – what would the world look like?