There are quite a few factors. These are a few of them:<\/p>\n
- \n
- The trade balance is one of the main factors. This is the calculation of a country\u2019s exports minus its imports. When a country\u2019s imports exceed its exports, the subsequent negative number is called a trade deficit. When the opposite happens, a country has a trade surplus. The trade balance helps to understand the strength of a country\u2019s economy in relation to other countries.<\/li>\n
- Another factor is the political climate of a country. Political stability, especially in emerging economies is very important. But not just in emerging economies \u2013 look at what happened in the UK in the wake of Brexit. A political decision to leave the EU ended up having huge ramifications on the pound.<\/li>\n
- Inflation also plays a part. If your inflation rate is very high, then the value of your currency is going to be eroded. South Africa\u2019s inflation rate is relatively higher than that in the US, that\u2019s why the rand is weaker than the dollar.<\/li>\n<\/ul>\n
Why do some countries\u2019 currencies fluctuate while others don\u2019t?<\/strong><\/p>\n
Most countries have no exchange control, that\u2019s why their currencies fluctuate in relation to the dollar. Countries like South Africa operate a flexible exchange rate system, which means the value of the rand is determined by the market forces of supply and demand. The demand for a currency relative to the supply will determine its value in relation to another currency.<\/p>\n
In certain countries, you have fixed exchange rates, like the United Arab Emirates, for example. Their dirham is pegged to the dollar, meaning it doesn\u2019t fluctuate at all. Such countries have very stable and predictable economies. Not a lot of countries have fixed exchange rate systems \u2013 it\u2019s mainly oil-producing countries and ones with small populations.<\/p>\n
Speaking of the US dollar \u2013 why is it used as the standard unit of currency?<\/strong><\/p>\n
It\u2019s by far the most tradable currency on earth. Of the four major currencies in the world \u2013 the US dollar, euro, British pound, Japanese yen \u2013 the dollar probably accounts for two thirds of all currency trade in the world.<\/p>\n
When the Bretton Woods Agreement [the landmark system for monetary and exchange rate management] was formed in 1944, America had the biggest economy in the world, and still does.<\/p>\n
So if the worst were to happen and the US economy crumbled, would the world shift to the next strongest currency as the standard unit of measure?<\/p>\n
Yes, but the problem with that idea is that the next biggest currency is the euro, and it\u2019s in severe distress. Many people have even questioned if the euro will exist in ten years\u2019 time. Sure, it\u2019s the world\u2019s biggest currency after the dollar, but would that necessarily make it the best currency to use if there was a flight from the dollar? Probably not. Maybe the Chinese yuan would be better.<\/p>\n
How does the strength or weakness of a currency affect the ordinary person?<\/strong><\/p>\n
The strength or weakness of a currency always reflects on the prices of goods. If a country\u2019s currency is weak and it imports more and more into the manufacturing process, the cost of the finished goods becomes significantly higher than it otherwise would have been. But if you\u2019re able to manufacture more of your inputs locally, you\u2019ve got a good chance of keeping prices stable and inflation low.<\/p>\n
On the other side of the coin, if the currency is stronger, finished goods easily become cheaper.<\/p>\n
Is the rand an easily tradable currency?<\/strong><\/p>\n
The rand is a highly traded currency all around the world. There\u2019s always ready buyers and ready sellers.<\/p>\n
Let\u2019s talk about the Big Mac Index \u2013 what is it and how does it work?<\/strong><\/p>\n
The Big Mac Index is a principle created in 1986 by [British magazine] The Economist as a way to measure the purchasing power parity (PPP) between countries, using the price of a McDonald\u2019s Big Mac burger as the benchmark. Its principle is simple: the input costs into making a burger should be roughly the same around the world, and if they\u2019re not, the differences should be explained by the difference in the value of currencies.<\/p>\n
However, there are a number of problems with The Big Mac Index, one of which is that it misses a very important point: a consumer\u2019s ability to purchase, or affordability.<\/p>\n
Below is a view of the rand\/dollar exchange over the last 35 years for more insight:<\/p>\n
![\"ABSA_Graph-768x512\"](\"http:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2016\/08\/ABSA_Graph-768x512.png\")
<\/a><\/p>\nRead the article here<\/a><\/h3>\n
More on the economy<\/h3>\n
Two signs that show South Africans are worried about the economy<\/strong><\/a><\/p>\n