What is Money?
Money can be defined as: A generally accepted medium of exchange. Theoretically,
money can be anything that people desire to own, not for its direct use, but rather
for its later value in trading for things that are useful. Before money was invented,
people bartered, swapping one item for another.
The origins of money
The earliest records of money being used come from ancient Mesopotamia (modern Iraq)
some 4,500 years ago. Payments were made with weighed amounts of silver. Since then,
weighed amounts of metal have been used as money in many places world wide.
Coins
The first coins were made in Lydia, Turkey, c.600 BC. Early coins were made of precious
metal. Today, they are more likely to be made of a common metal, like aluminum.
Leather currency
In 118 B.C., banknotes in the form of leather money were used in China. One-foot
square pieces of white deerskin edged in vivid colors were exchanged for goods.
This is believed to be the beginning of a kind of paper money.
Paper currency
From the ninth century to the fifteenth century A.D., in China, the first actual
paper currency was used as money. Through this period the amount of currency skyrocketed
causing severe inflation. Unfortunately, in 1455 the use of the currency vanished
from China. European civilization still would not have paper currency for many years.
Each country has its own money, or currency. So governments need a standard way
of judging how much a nation’s currency is worth, to work out exchange rates from
one currency in to another. In the 20th century, many Western governments measured
the value of a currency according to the value of gold and a nation’s gold reserves.
Various systems existed, which all related the value of a bank note to a precise
weight of gold. The gold standard system ended in the 1970’s; now the value of currency
depends on the market. Let's consider some of the factors that are used to determine
a currency's value.
• Political Conditions in the Country - This includes the stability of the
government, the amount of corruption, bribery and the degree of law and order.
• Budget of the government - The currency value of a country varies with
the government’s budget. If the revenue of the country exceeds its expenditures
then it has budget surplus and the currency rate increases. The opposite occurs
when the country has more debts.
• Economic Situation - These include economic policy, disseminated by government
agencies and central banks, economic conditions, generally revealed through economic
reports, and other economic indicators. Perception from Outside.
• Natural Resources - The kind of and amount of exploitation of a country's
natural resources certainly helps create a perception of value, or lack thereof,
of a country's currency. Mining of minerals, forests, oil, fish and other resources
are considered. Also the level of technology to development these resources.
• War and Conflicts - With which other country is a country at war, and who
is its allies? Their military strength and technology, their willingness to go to
war and for what
• Weather Factors such as drought, tsunamis, earthquake and floods are taken
into consideration. How frequent are they and how the country’s response to them
is. These also affect desirability, safety and perception of a country.
• Gross Domestic Product (GDP) - GDP is considered the broadest measure of
a country’s economy, and it represents the total market value of all goods and services
produced in a country during a given year. Since the GDP figure itself is often
considered a lagging indicator, most traders focus on the two reports that are issued
in the months before the final GDP figures: the advance report and the preliminary
report. Significant revisions between these reports can cause considerable volatility.
The GDP is somewhat analogous to the gross profit margin of a publicly traded company
in that they are both measures of internal growth.