Measuring the value and usefulness of a currency

[Hauldren Collider]

So at school I'm working on a project about the Euro. The question I'm supposed to look at is basically how the economy of a country is changed by joining the eurozone (beyond the obvious "they use the euro now"). But one thing I was wondering about is an idea I had about the value of currency.

There's a nominal value to currency, for instance how many ham sandwiches you can buy for $10, and there's exchange rates, but I'm interested in the utility of a currency. For instance, if you are in England and you have $10, 10 pounds, and 10 euros (I don't feel like finding the symbols), the pounds are going to be more useful. My thought is that the way you measure the usefulness is the disparity in the exchange rate, as in, if you get $10 in pounds and then trade your pounds back in, how many dollars did you lose? But how is that affected by how widely used the currency is?

Let's imagine for a minute that we have a measurement for how "useful" a currency is (since nominal value isn't meaningful for this). Basically, how effective is that currency as a means of exchange. Now here's a specific example, how much more "useful" would the Euro become with this measurement if another country were to join the Eurozone, for instance Sweden? I would think that the Euro's utility as a means of exchange would improve, but how can that be measured?

I predict that this question is rather silly and ignorant, and I'm not sure it makes complete sense, but does anyone have an answer?
Thanks.

[N35t0r]

My thought is that the way you measure the usefulness is the disparity in the exchange rate, as in, if you get $10 in pounds and then trade your pounds back in, how many dollars did you lose? But how is that affected by how widely used the currency is?

By supply and demand, obviously, as well as government regulations.

If I travelled to Japan, for example, I'd probably do much better to buy Dollars, and in Japan exchange those for Yen, rather than trying to find Yen here, or sell Pesos directly in Japan.

Competition and volume dictate how much spread there will be between buying and selling some currency.

So this difference is entirely situational... it might measure the utility of a foreign currency, but only in the place you're buying it.

[Hauldren Collider]

By supply and demand, obviously, as well as government regulations.

If I travelled to Japan, for example, I'd probably do much better to buy Dollars, and in Japan exchange those for Yen, rather than trying to find Yen here, or sell Pesos directly in Japan.

Competition and volume dictate how much spread there will be between buying and selling some currency.

So this difference is entirely situational... it might measure the utility of a foreign currency, but only in the place you're buying it.

But how is the exchange rate affected by more countries using the Euro? How does the enlargement of the Eurozone increase the value of the Euro, and how are the nominal value of a currency and its effectiveness as a medium of exchange distinct and how can the latter be directly measured?

Here's another example, a 2 dollar bill and two one dollar bills. They have the same nominal value but most stores don't like 2 dollar bills because cash registers don't have a slot for them--in many ways they are only semi-valid as a currency. They have the same nominal value but are less effective as a means of exchange. How can we measure this? In this specific case, you can look at the cost of handling cash, but I'm thinking of a more general example.


EDIT: I'd like to note that this isn't based on anything I've read, it's just a thought that I had that I couldn't think of an explanation for.

[Al B. Sure!]

The currency of the new addition is fixed to a certain exchange rate with the Euro ahead of time to facilitate the transition. There are also very strict inflation, interest rate, etc. controls for EU member states to ensure that the Euro remains the same value in each country.

I actually took both International Monetary Economics and International Financial Markets in college but I don't remember well enough to go deeper into this. We did talk a lot about the Euro though. Sorry.

[Al B. Sure!]

Here, HC, this is from wiki but it goes into some of the effects of Euro-adoption. Not exactly what you're looking for but it might be interesting to you:

Evidence on the effect of the introduction of the euro
In conformity with the economic predictions, empirical studies have found that the introduction of the euro has had a positive impact on the movement of goods, financial assets, and people within the eurozone. In addition, countries which previously had weak currencies have benefited from lower interest rates and their firms now have easier access to capital.
[edit]Trade
The consensus from the studies of the effect of the introduction of the euro is that it has increased trade within the eurozone by 5% to 10%.[46] On the lower bound, one study suggested an increase of 3%.[47] A recent study estimates this effect to be between 9 and 14%.[48] Nevertheless, a recent meta-analysis of all available studies suggests that the prevalence of positive estimates is caused by publication bias and that the underlying effect may be negligible.[49]
[edit]Investment
Studies have found a positive effect of the introduction of the euro on investment. Physical investment seems to have increased by 5% in the eurozone due to the introduction.[50] Regarding foreign direct investment, a study found that the intra-eurozone FDI stocks have increased by about 20% during the first four years of the EMU.[51] Concerning the effect on corporate investment, there is evidence that the introduction of the euro has resulted in an increase in investment rates and that it has made it easier for firms to access financing in Europe. The euro has most specifically stimulated investment in companies that come from countries that previously had weak currencies. A study found that the introduction of the euro accounts for 22% of the investment rate after 1998 in countries that previously had a weak currency.[52] The effect is however less clear for firms coming from the strong currency countries; the introduction has not been beneficial for most of them.
[edit]Inflation
The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices. Paradoxically, this impression has not been supported by general indices of inflation, showing no major effect of the introduction of the euro. A study of this paradox has found that it is due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods, it had an effect on cheap goods which have seen their price round up after the introduction of the euro. The study found that consumers based their beliefs on inflation of those cheap goods which are frequently purchased.[53] It has also been suggested that the jump in small prices may be because prior to the introduction, retailers made fewer upward adjustments and waited for the introduction of the euro to do so.[54]
[edit]Exchange rate risk
One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. It has been found that the introduction of the euro created "significant reductions in market risk exposures for nonfinancial firms both in and outside of Europe".[55] These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe". These changes were however "statistically and economically small".[citation needed]
[edit]Financial integration
The introduction of the euro seems to have had a strong effect on European financial integration. According to a study on this question, it has "significantly reshaped the European financial system, especially with respect to the securities markets [...] However, the real and policy barriers to integration in the retail and corporate banking sectors remain significant, even if the wholesale end of banking has been largely integrated."[56] Specifically, the euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the eurozone. [57] On a global level, there is evidence that the introduction of the euro has led to an integration in terms of investment in bond portfolios, with eurozone countries lending and borrowing more between each other than with other countries.[58]
[edit]Effect on interest rates
The introduction of the euro has decreased the interest rates of most members countries, in particular those with a weak currency. As a consequence the market value of firms from countries which previously had a weak currency has very significantly increased.[59] The countries whose interest rates fell most as a result of the euro are Greece, Ireland, Portugal, Spain, and Italy.[60]
[edit]Price convergence
The evidence on the convergence of prices in the eurozone with the introduction of the euro is mixed. Several studies failed to find any evidence of convergence following the introduction of the euro after a phase of convergence in the early 1990s.[61][62] Other studies have found evidence of price convergence,[63][64] in particular for cars.[65] A possible reason for the divergence between the different studies is that the processes of convergence may not have been linear, slowing down substantially between 2000 and 2003, and resurfacing after 2003 as suggested by a recent study (2009).[66]
[edit]Tourism
A study has found that the introduction of the euro has had a positive effect on tourism flows within the EMU, with an increase of 6.5%.[67]

[Hauldren Collider]

You are missing the point--the most baffling thing to me is that the 2 dollar bill is the SAME nominal value as two one dollar bills, yet you would rather have two 1 dollar bills than one 2 dollar bill because it's easier to use. The difference in utility is NOT reflected in the value of the currency because the value of a currency is, as far as I can tell, not or very loosely related to its actual utility, except perhaps in the exchange rate example I mentioned where you trade in and trade back and see what you lose.

xpost

[Hauldren Collider]

KrazyHorse--I am actually specifically hoping for your answer to this question, if you have one, I see you've been viewing the thread for a while . I haven't found anything on the internet so far about this, but I kind of doubt this is a new idea. Perhaps it is a hard question?

[Al B. Sure!]

You are missing the point--the most baffling thing to me is that the 2 dollar bill is the SAME nominal value as two one dollar bills, yet you would rather have two 1 dollar bills than one 2 dollar bill because it's easier to use. The difference in utility is NOT reflected in the value of the currency because the value of a currency is, as far as I can tell, not or very loosely related to its actual utility, except perhaps in the exchange rate example I mentioned where you trade in and trade back and see what you lose.

xpost

Oh I thought you were asking about the Euro specifically and what happens when new member states join.

With 2 vs 1 dollar bills, any additional utility you get from 'ease of transaction' is likely too minimal to warrant any effective difference in value.

[Al B. Sure!]

KrazyHorse--I am actually specifically hoping for your answer to this question, if you have one, I see you've been viewing the thread for a while . I haven't found anything on the internet so far about this, but I kind of doubt this is a new idea. Perhaps it is a hard question?

Oh jeez... I'm actually the guy who, as I said, took courses in International Monetary Econ from an accredited institution and KH is the brilliant one because he's read a few books


I don't get why you are asking these questions and why they perplex you. As far as I can tell, you're saying that whatever the exchange rate is between the pound and the dollar, you get additional utility by possessing pounds instead of dollars in England and dollars instead of pounds in the US beyond the straight exchange rate. You want to know how this is measured and how it is taken into account. Is that what you are asking?


Oh and if you keep converting currency, all you lose is the spread

[Hauldren Collider]

I really don't want this thread to turn into another one of your dickwaving contests Alby, I'm actually looking for help here, so please whine about your hurt pride elsewhere, thanks.

[Al B. Sure!]

I really don't want this thread to turn into another one of your dickwaving contests Alby, I'm actually looking for help here, so please whine about your hurt pride elsewhere, thanks.

Answer my damn question. Is that what you are asking?

[Kuciwalker]

There's a nominal value to currency, for instance how many ham sandwiches you can buy for $10, and there's exchange rates, but I'm interested in the utility of a currency. For instance, if you are in England and you have $10, 10 pounds, and 10 euros (I don't feel like finding the symbols), the pounds are going to be more useful. My thought is that the way you measure the usefulness is the disparity in the exchange rate, as in, if you get $10 in pounds and then trade your pounds back in, how many dollars did you lose? But how is that affected by how widely used the currency is?

This is called the bid-ask spread, and is a measure of the liquidity. So yes, it's a good thing to look at.

[Kuciwalker]

Holy ****, albie was a finance major and didn't see that immediately?

[Al B. Sure!]

His question is retarded, Kuci.

And I already ****ing said that it's the ****ing spread.

Well lookie here, whatcha know!

Oh jeez... I'm actually the guy who, as I said, took courses in International Monetary Econ from an accredited institution and KH is the brilliant one because he's read a few books


I don't get why you are asking these questions and why they perplex you. As far as I can tell, you're saying that whatever the exchange rate is between the pound and the dollar, you get additional utility by possessing pounds instead of dollars in England and dollars instead of pounds in the US beyond the straight exchange rate. You want to know how this is measured and how it is taken into account. Is that what you are asking?


Oh and if you keep converting currency, all you lose is the spread

[Hauldren Collider]

Kuci please don't make this a thread alby's competence thanks