It comes down to how much “stuff” you can get for 1 Mjumbo, v.s. how much you can get for 1 Diptu.
For example:
Say you live in Mjumbo where a Big Mac costs 10 Mjumbo.
One day you travel to Diptu, enter a McDonalds and see that the Big Mac only costs 1 Diptu.
That means 10 Mjumbos are worth about the same as 1 Diptu.
When you get back home from your trip, you find that you have 10 Diptu in cash left from your trip. So you go to the bank and ask to exchange it into your local Mjumbo currency.
The bank takes your 10 Diptu, and gives you 100 Mjumbo’s back (minus some administrative fees).
It’s not 100% accurate but you can think of money like stock in a nations economy. It’s value is determined by what people are willing to pay to have some of it. If that nations economy does better relative to other economies more people are willing to buy it at a higher price and if it does poorly then less people are willing to buy it.
This ignores some governments that offer fixed exchange rates to keep their currency value at a certain level.
Currencies get traded on exchanges. There you have the option to either make an offer that gets listed on the exchange like “I will buy 40$ and offer 39€” or you can accept an offer already put out by someone else. As these offers are public and you know all of them only the highest ones are accepted. You wouldn’t take the offer with 38€ when there is one with 39€ for the $40.
The last transaction generally is the current exchange rate and only in that direction of trading. So € in $ has one and $ in € has one. They are usually close to each other but not exactly the same. these rates are usually very stable and only vary in cents per dollar every day at most. That is because a lot of them get traded every day so the standing offers are in the hundreds of millions of dollars amount and a lot of them would have to be bought to get to the next lower offer. Per day trillions of Dollars and Euros get traded on exchanges.
With convertible currencies it is a market, how many mjumbos will you pay to have a diptu instead today? Many currencies aren’t freely convertible (at least legally) and others are a mix where the central bank regularly intervenes as a buyer or seller to keep the currency within a band or ‘peg’.
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It is based on how much people are willing to pay. The market is typically set by large buyers.
NGOs like the World Bank provide currency conversion and loan services to governments around the world.
It comes down to how much “stuff” you can get for 1 Mjumbo, v.s. how much you can get for 1 Diptu.
For example:
Say you live in Mjumbo where a Big Mac costs 10 Mjumbo.
One day you travel to Diptu, enter a McDonalds and see that the Big Mac only costs 1 Diptu.
That means 10 Mjumbos are worth about the same as 1 Diptu.
When you get back home from your trip, you find that you have 10 Diptu in cash left from your trip. So you go to the bank and ask to exchange it into your local Mjumbo currency.
The bank takes your 10 Diptu, and gives you 100 Mjumbo’s back (minus some administrative fees).
It’s not 100% accurate but you can think of money like stock in a nations economy. It’s value is determined by what people are willing to pay to have some of it. If that nations economy does better relative to other economies more people are willing to buy it at a higher price and if it does poorly then less people are willing to buy it.
This ignores some governments that offer fixed exchange rates to keep their currency value at a certain level.
Currencies get traded on exchanges. There you have the option to either make an offer that gets listed on the exchange like “I will buy 40$ and offer 39€” or you can accept an offer already put out by someone else. As these offers are public and you know all of them only the highest ones are accepted. You wouldn’t take the offer with 38€ when there is one with 39€ for the $40.
The last transaction generally is the current exchange rate and only in that direction of trading. So € in $ has one and $ in € has one. They are usually close to each other but not exactly the same. these rates are usually very stable and only vary in cents per dollar every day at most. That is because a lot of them get traded every day so the standing offers are in the hundreds of millions of dollars amount and a lot of them would have to be bought to get to the next lower offer. Per day trillions of Dollars and Euros get traded on exchanges.
You’ve got to remember that these are independent systems that evolved on their own and were compared at a later date.
House 1 uses chits, house 2 uses chats.
House 1 uses 1 chits to exchange for 1 hamburger.
House 2 uses 2 chats for a similar or the same hamburger.
These prices were decided by each house internally without talking to each other.
Later on the economies mix but they want to keep their own currency so they have to figure out what the exchange rate will be.
1 chits = 2 chats.
With convertible currencies it is a market, how many mjumbos will you pay to have a diptu instead today? Many currencies aren’t freely convertible (at least legally) and others are a mix where the central bank regularly intervenes as a buyer or seller to keep the currency within a band or ‘peg’.