What are Currency and Exchange Rate? Easy Peasy Finance for beginners
Introduction to Currency for Kids and Teens
This video explains the concept of currency & exchange rate in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about these, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
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Suitable for students from grade levels:
- Kindergarten
- Elementary School
- Middle School
- High School
The topics covered are:
- What is currency
- What is exchange rate
- Why are currencies and exchange rate important
- How do currency and exchange rate impact me
Old Version
- What is Currency
- Does every country need a currency
- What happens if you go to another country which has a different currency
- How is the exchange rate between different currencies decided
- What is Bitcoin
What is currency?
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A currency is the official money of a specific country or a group of countries.
For example, the currency of the United States is the US dollar, and the currency across 20 European countries including Italy, France, Spain, and Germany is the Euro.
Currencies are represented using 3 letter codes, like USD for US Dollars, EUR for Euro, JPY for Japanese Yen, etc.
Currency includes physical money like coins and banknotes, digital money like in a bank account, as well as cryptocurrencies like Bitcoin.
What is exchange rate?
Exchange rate is the relative value of one currency compared to another. It is the rate at which one currency can be exchanged for or converted into another currency, and is usually represented in currency pairs.
For example, EUR/USD is 1.05, which means 1 Euro is worth 1.05 US Dollars. So if you are traveling to Europe and need 100 Euros, you need to pay $105.
Most exchange rates are floating, meaning they are constantly fluctuating based on a variety of factors, such as supply and demand, interest rates, political and economic stability, and even unforeseen events like natural disasters.
However, some currencies are pegged to a major currency like US Dollar or Euro, which means their exchange rate is tied to the value of that other currency. For instance, Saudi Arabia’s Riyal is pegged to the US Dollar.
Exchange rates also apply to cryptocurrencies. For example, Bitcoin’s value is represented in US Dollars and fluctuates like any other floating currency.
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Why are currencies and exchange rate important?
The system of currencies and exchange rates is crucial to international trade and finance.
They make international trade possible, allow tourists to exchange for the local currency while traveling, affect prices of goods due to currency fluctuations, and impact international investments.
How do currency and exchange rate impact me?
They impact you the most when it comes to international travel and investing.
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Let’s say you live in the US which uses the US dollar, and are traveling to the UK which uses the British pound. Since you can’t use dollars in the UK, you’ll need to exchange some US dollars into British Pounds.
And their exchange rate determines how much you’ll get when exchanging money. Right now, 1 dollar is equal to around 0.79 pounds. So if you exchanged $100 dollars, you’d get 79 pounds.
However, if the exchange rate was 1 dollar for 0.6 pounds, you’d get fewer pounds – meaning things in the UK would cost you more, and the cost of your trip would increase.
In addition, if you invest internationally, the exchange rate fluctuations can impact your returns. Some people also invest directly in currencies through the Forex market.
Currency and Exchange Rate: Old Version
What is Currency and Exchange Rate? A Simple Explanation for Kids and Beginners
Howdy Wall Street Willy. A friend asked me about currency.
But what is a currency anyway?
A currency is a type of money issued by a country. That currency is usually only accepted in that one country.
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For example, the currency of the United States is the U. S. Dollar.
Well, what’s the currency of Canada?
The currency of Canada is the Canadian dollar.
Well, what’s the currency of Australia?
The Australian dollar.
What’s the currency of Singapore?
The Singapore dollar.
Is every country’s currency a kind of dollar??
No Sooper Cooper. Of course not. It’s different for different countries.
For example, the currency of the United Kingdom is the Pound, and the Japanese currency is the Yen.
Does every country have to have a currency?
Usually they do, but sometimes a group of countries can have a common currency. For example, most countries in Europe have the Euro as their currency.
What happens if I go from one country to another, and both countries have a different currency?
Do I have to get a job and earn there, in that currency?
No, you can exchange one currency for another currency. But the value might be different for different currencies.
For example, 1 US dollar is worth 113 Yen. This is called the exchange rate.
Whoa! 113 is a lot of money!!
Yes, but it is the same amount of money if you exchange it back for US dollars.
Who decides the exchange rate?
Some countries have a fixed exchange rate where their government will decide the value of the currency, and when it will change.
But the currencies of most countries are traded just like stocks in a market called the forex market or the foreign exchange market. Their exchange rate is decided by various economic factors, like how fast the countries are growing, how stable they are and the interest rate in each country.
Currencies of most countries are traded in amarket called Forex / Foreign Exchange market. The exchange rate is decided by factors like thegrowth rate and interest rate in eachcountry. #FinancialLiteracy #FinanceForKidsClick to Tweet
Well, does the exchange rate stay the same or does it change over time?
For currencies that are traded in the forex market, the exchange rates will change every day – just like stock prices.
What happens when people from two different countries are doing business with each other?
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What currency would they pay in?
Either they would pay in the currency from one of the two countries, or more likely, they would use US dollars, because US dollars are a very widely accepted currency.
Well, I keep hearing about Bitcoin.
What is Bitcoin?
Bitcoin is a type of crypto currency, but that’s a topic for another time…
Thank you very much for telling me about currency and exchange rates, Wall Street Willy.
You’re welcome, Sooper Cooper. Remember, finance is your friend!
Conclusion
Would you like to know anything else about currencies or exchange rates? Please let us know in the comments below.
Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids & Teens
Podcast: What is Currency and Exchange Rate?
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