Currency

November 23, 2010Currenciesby EconomyWatch

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A form of money that serves as a medium of exchange in a country and is meant for public circulation within it is called currency. It also functions as a standard measurement and store of value. Paper notes and coins issued by central banks become the currencies of the respective countries.

The value of a currency in a country is determined on the basis of daily trade. The region in which a particular currency is used as a unit of exchange becomes the currency zone of that currency. Any currency issued by a country located outside this currency zone will be categorized as foreign currency in this region.

Types of Currencies

Based on exchange rate guidelines, currencies fall under two categories:

  • Floating currency: This is a currency the value of which is regulated by the currency market. Its value appreciates when the issuing country has a surplus in trade or on the capital account.
  • Fixed currency: This is a currency the value of which is set by the monetary authority of the issuing country. Fixed measurement standards, like the value of the country’s currency with respect to a foreign currency, a basket of currencies or gold, are used to calculate the currency’s exchange rate.
  • Floating currency: This type of currency is regulated by the currency market. Its value appreciates when the issuing countryhas a surplus in trade or on the capital account.
  • Fixed currency: The value of this type of currency is set by the monetary authority of the issuing country. Fixed measurementstandards, like the value of the country’s currency with respect to a foreign currency, a basket of currencies or gold, are used to calculate the currency’s exchange rate.

Regulation of the Exchange Rates of Currencies

In order to facilitate multilateral trade, countries regulate their exchange rates vis-à-vis other currencies. Often, countriesuse the prerogative of producing and circulating their official currency to alter its exchange value. Such decisions are taken by the Ministry of Finance or the central bank of a country.

The member countries of the Economic and Monetary Union of the European Union do not have the authority to produce or distribute currency. These decisions are taken by the European Central Bank (ECB) on behalf of the member nations. The Euro, whichis commonly used by the 16 of the member nations of the European Union, is called a common currency.

Various countries use a common name for their currency, such as the dollars, pounds, pesos and dinars. These will normally havelocal variant names, such as the US Dollar, Canadian Dollar and Australian Dollar.

Online Currency

The term e-currency or online currency refers to currency or scrip that is exchanged electronically. In other words, it is the unit of exchange that is widely used on the Internet. Transactions in online currencies have become increasingly popular owing to their simple and instantaneous nature. E-currencies have created a borderless world, where people can carry out commercial transactions in a matter of a few clicks.

The evolution of the application of currency from punch marked coins to this contemporary stage of e-currency illustrates the need for sophistication of the systems of exchange.