What Factors Affect Currency Valuation?

Price and money, economic terms. It is the value of a commodity expressed in money, that is, the comparative relationship between the value of a commodity and the value of money. It is an inherent factor that affects the changes in commodity price levels.

Price and currency

The price of a commodity is directly proportional to the value of the commodity and inversely proportional to the value of the currency. Commodity prices will generally increase only when the value of the currency is unchanged and the value of the product is increased, or when the value of the product is unchanged and the value of the currency is reduced. Conversely, the price of a commodity will generally decrease only when the value of the currency remains unchanged and the value of the commodity decreases, or when the value of the commodity remains constant and the value of the currency increases. But this applies only to goods of constant value. For example, if the value of certain commodities and the value of money increase at the same time, the prices of these commodities will not change. If the value of these commodities increases more slowly or faster than the value of money, the decrease or increase in the price of these commodities is determined by the difference between the value changes of these commodities and the value of money. And so on. Changes in the value of money affect changes in commodity prices, and thus the overall price level.

When metal currency is in circulation on the market, its quantity depends on the price of the commodity. Because metal money itself has value, the amount of money in circulation can automatically adapt to the needs of commodity circulation through the storage and withdrawal of the currency itself. Therefore, the increase or decrease in commodity price levels will not be caused by more or less currency in circulation.

When banknotes are circulated in the market, the value represented by banknotes is mainly determined by the quantity of commodities and currency in circulation, and the price of commodities depends on the quantity of currency in circulation. At this time, the relationship between commodity prices and currencies showed the following three states: ^[1]

First, when the amount of banknotes in circulation is compatible with the amount of money required for the circulation of commodities, or when the value of commodities and the amount of value represented by banknotes change in the same direction and the same magnitude, the commodity price level remains basically stable.

Second, when the number of banknotes in circulation exceeds the amount of money required for commodity circulation, it will cause the price level to rise. The demand for money in the process of social reproduction has a certain limit. With the development of production and the expansion of circulation, the money supply must be increased accordingly. However, an excessive increase in the money supply will cause a decline in the value of currency and a general rise in prices. As the total number of price symbols increases, the amount of gold represented by each symbol decreases in the same proportion. The rise in prices is simply a reaction to the forced price symbols in the circulation process to equalize the amount of gold in circulation. Practice has proved that each time a general rise in prices is due to the amount of money in circulation exceeding the demand for money in the reproduction process. Because of this, Western economics often considers inflation to be equal to rising prices. Therefore, the key to maintaining the basic stability of market prices is to control the release of money and keep the currency in circulation at an appropriate level.

When there is too much money supply and prices are regulated, there will be a shortage of goods. In China, the prices of major commodities related to the national economy and the people s livelihood are controlled by the state in a planned manner. After excessive currency issuance, only the price of some commodities will rise instead of the general rise in prices of all commodities. This is because, when there are too many currency issues, price limiting and rationing are adopted for some commodities, which reduces the impact on prices and suppresses the rise in prices. However, this only temporarily restrained the rise in prices, the market's capacity for currency has not expanded, and the excessive amount of money in circulation has not been absorbed, but has precipitated and accumulated in society, forming the potential to drive up retail prices. pressure. Shortages and price increases are interchangeable, that is, when there is too much money supply, price controls will cause shortages, price liberalization will cause price increases, or some commodity prices will be regulated and shortages will occur, and other commodity prices will be released and soared. .

Third, when the money supply is inadequate, it will lead to a sluggish economic operation and weak sales, which will cause prices to drop abnormally. Of course, tight currency control can bring down the rising prices, but tightening the money supply and compressing the money supply are overdone, which will affect the normal operation of the economy due to currency shortages, impede commodity sales and commodity circulation, cause market weakness, and increase inventory. Some factories stopped production or partly stopped production, and some workers were unemployed or semi-unemployed. This fall in prices is also not conducive to the healthy development of the economy.

When using interest rate leverage to regulate currency circulation, we must consider both the impact of price changes on interest rates and the impact of interest rates on prices. High interest rates can tighten deflation and help stabilize prices, but they also increase the burden on production and distribution companies, increase costs, and cause prices to rise. Low interest rates will reduce deposits, increase the currency in circulation, and cause prices to rise; but they can also reduce the interest burden on production and circulation companies, reduce costs, and help stabilize prices. Therefore, when indirect macroeconomic regulation and control, we need to comprehensively consider from multiple aspects, weigh the impact of interest rates on production and prices, and choose an appropriate level of interest rates.