Currency Structure of World Economy and International Economic Relations

Currency and Exchange Rates

The Essence of Currency and Exchange Rates

The term "currency" in the broad sense is any product that is able to act as a medium of exchange in international payments. In a narrower sense, it is the available supply of money, which passes from hand to hand in the form of banknotes and coins.

Currency provides communication and interaction of national and world economy.

Depending on the belonging (status), currencies are divided into national, foreign and international (regional) ones.

National currency is the statutory means of payment of the country: the currency notes in the form of banknotes, bills and coins or other forms that circulate and are legal means of payment in the country, as well as payment documents and other securities (stocks, bonds, coupons for them, bills of credit (transfer note), loan notes, letters of credit, checks, bank orders, certificates of deposit, savings books and other financial and banking documents), denominated in the currency of that country.

The national currency is the basis of the national monetary system.

Foreign currency is the currency notes of foreign countries, credit and payment instruments, denominated in foreign currency units and used in international payments.

International (regional) currency is an international or regional monetary unit of account, means of payment and reserves. For example, the SDR (Special Drawing Right) is an international means of payment, which is used by the IMF for noncash international payments through the records in special accounts, and the payment unit of the IMF, the Euro is a regional international payment unit of the EU's countries.

In relation to the currency reserves of the country, there are distinguished the reserve currency. Under the reserve currency realize the foreign currency, in which the central banks of other countries accumulate and store reserves for international payments on foreign trade transaction and foreign investment.

In relation to other currencies distinguish strong (hard) and weak (soft) currency. Hard currency is characterized by a stable exchange rate. The concept of hard currency is often used as a synonym for convertible currency.

Under the usage mode distinguish fully convertible currency (currencies of countries that have abolished exchange restrictions and exchange them for any other currencies), partially convertible currency (currencies of countries, which keep exchange restrictions to a certain range of exchange transactions) and non-convertible currencies (currencies of countries that fully remained exchange restrictions concerning all transaction for both non-residents and residents).

On material form, the currency can be cash and cashless.

According to the construction principle, there are the "basket" and the usual type currency. The currency basket is a method of commensurability of average weighted exchange rate of one currency in relation to a specific set of other currencies. The important aspect of the calculation of a basket of currencies is to determine its composition, size of the foreign currency component, that is, the number of the units of the currency in the set.

Currencies usually exchange not only one for another, but also in a certain ratio, which is determined by their relative value and is called the exchange rate.

"The currency exchange rate" is:

1) the number of units of one currency required to purchase a unit of another currency;

2) the market price of one currency denominated in another currency;

3) the aggregate price of currencies, interconnected by a tripartite arbitration.

The subject of the currency operation is the exchange of currency of one country for the currency of another country. Each national currency has a determined price, which is denominated in currency units of the another country. This price is called the currency exchange rate. Prices of currencies are published daily. Prices for fully convertible currency are determined in the foreign exchange market and based on supply and demand for it, and in countries with a partially convertible currency, its price fixed by the central bank. Thus, the currency or exchange rate has a quantitative determinacy, which is the ratio of number of exchangeable currencies. Determination of the exchange rate is called the quotation. There are two methods of the foreign currency quotation to the national one: direct and indirect. With direct quotation the rate of one unit of foreign currency is dominated in the national currency (1 USD = 5.0 UAH). With indirect quotation the rate of one unit of national currency is denominated in the foreign currency (1 UAH = 0.20 USD).

In performing the quotation, it is set the base currency and the quote currency. The base currency is the currency, with respect to which other currencies are quoted, i.e. the currency with which it is compared a specific currency unit. The quote currency is the currency, which is quoted to the base one, i.e. the currency, the exchange rate of which is determined. The rates of currencies are set to the base currency, i.e. how much of the quote currency corresponds to a unit of the base currency. As a rule, all currencies (except the British pound sterling and a basket of currencies) compared to the U.S. dollar. The use of the dollar as the base currency reflects the role of the dollar as a recognized payment unit.

By the analysis of dynamics of exchange rates it is accounted the quotation method. Since the exchange rate is the price of money, then its changes mean that prices get higher and the depreciation of money take place. The national currency becomes more expensive, if the exchange rate, determined by the method of direct quotation, gets lower (was 5.4010 UAH / 1 USD, became 5.1210 UAH / 1 USD), and becomes less expensive with exchange rate increasing.

< Prev   CONTENTS   Next >