What are the differences between a currency and a commodity – quora usd zar rate


Shorter Newer Answer: The traditional definition of a currency is that it is a medium of exchange and a store of value nz to usd. The traditional definition of a commodity is that it is a nearly-perfectly fungible good. A commodity could be used as a currency if it is convenient to do so. Likewise, a currency can become a commodity under certain conditions.

Under what conditions can a currency become a commodity? Sepp Hasslberger suggests that ideally a currency would have static value. In reality, no well functioning economic system is ever static. Ergo:

• If the value of the currency is slowly depreciating (inflation), people do want to use the currency as a method of exchange. If today, $1 will buy 2 loaves of bread, and tomorrow, $1 will only buy one loaf of bread, you will rush out to get bread today.

• If the value of the currency is slowly appreciating (deflation), people prefer not to use that currency as a method of exchange eur usd exchange rate forecast. If today, $1 will buy you 1 loaf of bread, and tomorrow, $1 will buy you 2 loaves of bread, you will just wait until tomorrow to get 2 loaves of bread. But then tomorrow you decide to wait until the next day when you can buy 3 loaves of bread with $1. And so on, until you figure out a way to buy bread without sacrificing the growth potential of the $1 bill.

Thus an ideal currency has a slowly decreasing value. Those holding the currency could use it as store of value but doing that in the long run would be a bad idea. As the value slowly erodes, currency-holders are motivated to exchange it for other goods or services. If, instead, the currency slowly appreciates in value it takes on the role of a commodity, as people try to take advantage of its store of value qualities and will switch to something else to fulfill their exchange needs.

Longer Older Answer: A currency is something that is used as both a medium of exchange and a store of value. A currency may be backed by an official government fiat, which means that government makes it illegal to not accept that currency. Additionally, some governments may have a monopoly on the production and control of the currency.

However, neither of these conditions are necessary. In prisons, for example, cigarettes are often a de facto currency without any fiat. Likewise, lots of countries, for example Ecuador, use US dollars as their official currency usd to rmb. Obviously those countries to not have monopoly control over the dollar.

A commodity is a good that is exchanged in a standardized quality and quantity using forward contracts. For example, one can buy a Dec11 contract of WTI at the CME. What this means, is that the buyer is agreeing to accept delivery of 1,000 barrels of West Texas Intermediate crude oil on December 31, 2011 in Cushing, Oklahoma. Meanwhile, the seller is agreeing to deliver that oil at the agreed price funny jokes tagalog. WTI is a quality benchmark, an indicates that the crude in question is of the light and sweet variety. One barrel of WTI is as good as another. There are no differentiators in quality within the same commodity class.

Thus, everyone who participates knows exactly what they are getting. Most participants in commodity (nowadays) do not expect to accept/make delivery. Instead, they participate in the markets to hedge against future supply demand/shocks and price changes and expect to clear all of their positions before the contract expiration date.

Historically, many currencies have been backed by a commodity (gold or silver) or have been a form of a commodity themselves (cigarettes in prison; gold and silver) binary algorithm. This is no longer the case with most modern economies. The only thing backing the US dollar or the Euro is the fundamental of the people in the stability of the US government and the European Union.

The value of a commodity is determined by market operations and supply and demand. Sellers set and adjust asking prices, while buyers bid. The price of a commodity can fluctuate rather quickly, however, this depends on the liquidity of the market. The value of a currency is determined by interest rates which are, in turn determined by macroeconomic conditions. High interest rates indicate that the value of money is high – thus borrowers have to pay a higher price for access money.

The only way that a western Central Bank can affect the value of a currency is through either (1) open market operations or (2) setting the reserve requirements. In the first case, the Central Bank buys or sells government to control the supply of money usd inr live. In the second case, the Central Bank tells banks how much of their currency reserves they must store and not lend out, which also affects the supply of money. By semi-controlling the money supply the Central Bank impacts the interest rates that the banks charge each other.

If the Central Bank estimates demand correctly and does their math right, they target the interest rates so that there is slight inflation- ie the value of money decreases with time. If the value of money increased with time (deflation) then people would hold on to their money and treat it like any other appreciating asset. If the value of money decreases too much with time, then people lose confidence in the currency and stop working and/or buying stuff.

In the absence of direct Central Bank controls, the value of the currency is simply determined by consumer confidence, currency availability, ease of use etc.

If a certain population has access to several currencies then inflation/deflation is not as much of a problem as people would switch between whatever currency is more convenient or stable. In 1990’s Russia almost anyone who could started exchanging and storing all of their money in USD, as it was appreciating in value against the Ruble. Prices were set in US dollar equivalent and most private sector salaries were denominated in US dollar equivalent. It was hard for public sector employees, whose wages did not adjust, or those who did not have access to USD- but most people got used to it fraction calculator that shows work. Even in the 2000’s, when the Ruble stabilized, most people/business retained this habit, except in Euros.

In the Russian scenario the dollar took on the role of a store of value and an investment-grade commodity. Meanwhile, the Ruble remained the method of exchange as wages and prices had to be legally set in Rubles.

It is never a "problem" if the price of a commodity goes up or down as it is fundamentally a reflection of the inherent value of the commodity. With the possible exception of gold, most people who trade commodities do so because they need to, either because they extract the commodity and need to sell it or because they make something out of it and need to buy it. Gold is unusual because unlike wheat or oil, all of the world’s extracted gold could fit in a large grain silo (~20 cubic meters) and the stock of gold is constant convert to binary. Thus, it makes economic sense to treat it as an investment. For most commodities, it does not make economic sense to treat them as investments (or currency) – you need a lot of space and/or they spoil. [1] [2] This also makes most commodities a terrible choice as a currency. Gold can be used as a currency but if its value keeps appreciating (deflation) and its supply is finite, most people will end up switching to something else. Which is why we do not use it anymore.

[1] Although some people treat wine, land, baseball cards as investments, none of those are perfect commodities though since they are not fungible.

A currency serves as a record of transactions. It provides a record of the value of some commodity or service that has been supplied by one party to another. A currency ideally does not, by itself, have value. It isn’t a commodity.

The two are quite different, one from the other, and their functions don’t mix well. If a currency is treated as a commodity, meaning it is treated as something valuable in and of itself, its record keeping function suffers. The fact that a commodity can be bought and sold means it has independent value xag usd. If a currency has independent value as we consider it to be the case today, it can no longer be the impartial measuring stick and record keeper for commercial transactions that it should be.

A currency can be, but does not have to be, something that has material value. You can have a currency consisting of gold and silver coins, as you can have a currency of, say, cigarettes in prison, as Dimitry Lukashov pointed out in a previous answer here usa today sports scores. But a currency can also be just bits paper, or cheap metal coins without material value, or even electronic bits in a computer memory.

A commodity may be used as a currency to mediate exchanges, but its principal use is – in the case of cigarettes – to smoke or (in the case of precious metals) to use as ornaments, or as an industrial raw material in technical applications. Think of gold plated electric contacts or of platinum in catalytic converters.

It is often said that a currency is used as a store of value. I would suggest that is an improper use of currency, as it conflicts with the principal use of a currency, the mediation of exchange.

In order to mediate exchanges, a currency has to flow. It has to be dynamic. If you want to use it to store value, the currency must not flow, it has to be static.

We would be much better off to restrict the use of currencies to the mediation of economic exchanges and to use commodities instead as a store of value. Those two functions do not mix well.

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