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Currency Craze! In the last lesson, you learned that money is more of a concept than an actual thing. Money is expressed as currency . Currency is the thing used as a medium of exchange. Currency has taken many forms over time. It has evolved from commodity money , like shells or beads, to metal coinage, to paper backed by precious metal, to fiat money, to electronic funds. Every country or economic unit has its own currency. Currency also refers to the specific name a country or economic unit has given to its legal tender. For example, if you’re buying or selling goods or services in the U.S. it’s in dollars . In Sweden, sales are transacted in krona . Most countries issue their own currency, with a unique name and symbol. The symbol for the dollar is $ . Since several countries call their currencies by the same name, the country is often identified next to the symbol with a currency code, such as USD for American dollars, or CAD for Canadian dollars. In Japan, currency is called the yen . The symbol for the yen is ¥ and its code is JPY . China's currency is the Yuan Renminbi (pronounced and referred to as wan ). Its symbol is ¥ and its code is CNY . In the United Kingdom, the currency is the pound sterling , or less formally the pound . Its symbol is £ and its currency code is GBP . (Don’t let the reference to “sterling” fool you. While the pound sterling was once backed by sterling silver, it is now backed by fiat.) Whether a transaction is conducted in cash or electronic funds, it is always conducted in a currency. Currency Conversion To be financially literate, you should know how commerce works when a business or person using one type of currency wants to purchase goods and services from a business or person in another country. So let’s revisit the French flash card sale dilemma. Recall that one of the key functions of money is that it is widely accepted medium of exchange. Classybucks are not the medium of exchange in Deskopolis. For the sale to succeed, Classybucks must be converted into Deskmoola. The problem with converting currencies is that the values of currencies of different countries are not equal . Conversion is rarely a 1:1 proposition. For example, if you were to exchange one $1.00 USD for one Japanese yen, (1¥) you would be getting a very bad deal indeed because, as of this writing, the yen is worth only 1/118 of the value of your dollar. The rate at which one country's currency can be exchanged for another’s is called the exchange rate or foreign exchange (FX) . In this case, the exchange rate of dollar to yen is about 1:118, so you should receive 118 yen (¥118) for your one dollar ($1). When you convert one currency to another, you are in effect, buying that country’s currency. Exchange rates set the price of the currency. Most exchange rates are free floating , meaning they are not set by any government agency or central bank. They are determined by how much demand there is for the particular currency. Another important thing to know about converting currency is that exchange rates fluctuate relative to each other . For example, a change in the exchange rate between the US Dollar and Chilean peso impacts only an exchange of the currencies of those two countries. SLIDE 5G SLIDE 5H PRODUCT PREVIEW
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THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY
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