18.104.22.168 Value of Currency
Over a period of time, prices of goods and services can rise (or fall). Prices are quoted in the currency of that country, so another way of understanding price rises is to see them as a fall in the value of the currency. This is what is commonly called inflation and it has to be taken into account in management of the economy, as discussed later (22.214.171.124).
A currency is a commodity. This can be clearly seen when considering what is happening when one changes pounds into dollars, for example. There is a price – the exchange rate – for how many dollars can be bought for a pound, which varies according to market perceptions of the strengths of the American and British economies in this case. If the pound depreciates in value against the dollar, someone in Britain would have to pay more in sterling than previously to buy the same goods or services from America.
Lenders in financial markets are taking a risk that loan repayments, in whatever currency had been agreed with the borrower, might be worth less by the time that the repayment is received if the currency has depreciated in value. This is a very significant risk if the loan is over a long period, as is often the case with government borrowing (126.96.36.199) for example, so the lenders charge a higher interest rate (‘yield’) if they consider that the economy is weak.
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