My stupid question about Value Of Money

[anubisX]

I know it's a stupid question to ask but I really don't know or forgot how the value of a currency is set. Let's say Rupee, how does a Rs.2000 have a value of Rs.2000 when it costs Rs.3.91 to print it. I mean why does these piece o paper costs that much as printed :lol: Sorry, if I can't make u understand my question, English is not my first language I mean to say, why a note that has Rs. 100 printed on it has value of Rs. 100 and how is that set by RBI ?

 

[soundbuff]

Hi,
Its not a stupid question of course, but I am not sure if you are going to find an answer in this forum. What you seem to be asking is a basic/elementary question in economic theory, about the nature of value, or more specifically the relation between tokens or representations of value and value. It would be better if you look to more appropriate sites which can guide you to the relevant literature. I am unfortunately not an economist by formal training else I would have attempted a potted explanation of sorts.
Best of luck

 

[Vinod.R]

I am not an Economist either but I think usually the value of a country's currency is set by various factors.

One primary one that I know is the demand and supply curve of that particular currency which sets the value of the currency.

Also excess printing of a particular currency hastens the value of that particular currency to fall.

For example also how much a currency gains value can also be assessed by how much a Government backs its currency. (As the USA does of its dollars with gold in the fort knox).

Then GNP, GDP, goods and services sold, a strong economy etc also determines the value of a particular currency.

These are some of the tit bits that I know. I welcome any corrections.

 

[anubisX]

I'm getting the currency part but I want to know how those pieces of paper with 100 written on it has value of Rs. 100 I know this is hard to express but I'll try the other sites

 

[panditji]

It is the same thing as an amplifier/speaker/cable which costs an x amount to make but the manufacturer states it's worth as 10x... So whoever prints the note, they decide what the value is... it does not matter what it costs but what the manufacturer puts the value as.

Sorry, could not be of any help...

 

[mahaaprasaad]

I know it's a stupid question to ask but I really don't know or forgot how the value of a currency is set. Let's say Rupee, how does a Rs.2000 have a value of Rs.2000 when it costs Rs.3.91 to print it. I mean why does these piece o paper costs that much as printed :lol: Sorry, if I can't make u understand my question, English is not my first language I mean to say, why a note that has Rs. 100 printed on it has value of Rs. 100 and how is that set by RBI ?

As I understood, the RBI can not print and circular the money as it wish. First thing it can print money only against the old notes destroyed, it means that total currency rotation in the country shall be same always. The value of the currency (piece of paper) printed offset by keeping aside equal amount(or some percentage) of Gold in reserve in the Reserve Bank. It is mandatory. That is what the Govverner of RBI promises on the note that He will pay you the value of Rs............. so against present of that note. The reserve gold can not utilised by the Government for any other reason. So, in practical, there is a reserve of tons of Gold in the RBI against the money in circulation at present.

Same case applies to currency in all the Countries. That is the the reason, you can exchange your money to any foreign currency valued against the Gold price on the day. Otherwise, there is no way, you can exchange for foreign currency.

The Reserve bank can print the notes and keep in stock(That to for some ratio of total circulation in country may be around 3% and also to the extent it will get the old notes), but can not circulate it unless the sl. no. is registered in a registry, old note destroyed/gold reserve provided. Till the Note sl. No. enters in the registry, it will be piece of paper, but once it is registered it will get value and released for circulation. Sl. No. registration (in the book provided) is a critical stage of the release of currency, it is maintained since the rule of British, and still followed very carefully under very high supervision and security. It is like a "Praana prathistapana" for the Stone, which will become God.

In the present situation, everybody complain that, why the government has not printed enough notes for circulation, in advance, before demonitising it. In reality, the Govt might have printed(as per the ratio permitted), but it can not circulate till the old notes are reached back the RBI, registered once again, destroyed and allow new release. As fast as the people surrender their old money, that much fast the RBI releases the new notes.

 

[Amitkg]

@mahaaprasaad, Thanks for explaining it nicely.

Sent from my MI MAX using Tapatalk

 

[anubisX]

Very nicely explained So much to learn, isn't it ?!

 

[omishra]

@mahaaprasaad, nicely explained.

So piece of printed paper after legally issued, is legal tender against it's value which could be bartered against equal valued goods or exchanged. Why so? Because RBI issued it which has equal worth with it.

In similar situation, you issue cheque from your accounts but for limited acceptability over the bank counter only, provided you have worth in your account. Otherwise it is piece of paper only.

 

[rahulz5]

So lets say in India hypothetically we have 10000 Rs to start with. Now, I have only 100 Rs. So i start printing my own money and introduce another 10000 Rs in the market. But in the market there is only X amount Rs worth of goods to buy. So now we have 20000 Rs worth of money chasing X Rs of goods. So people selling goods will hike price to 2X to manage the high demand. So in the end even though you have Rs 10000 you end buying less than Rs 10000 worth of goods. This causes inflation. This is the reason why RBI likes to control the amount of money circulating in the system.

The link between Money Supply and Inflation | Economics Help little heavy reading

What you are talking about is Face Value. Which totally meaningless number. What really matters is the amount of goods/services you can purchase with it over time

 

[mathan]

I am not sure why the government needed to print Rs.2000 notes. Does it not cause more inflation if higher denomanation notes are printed? In USA the highest denomanation notes is only $100 and that too I have never seen it used there as almost all items are bought and sold through digital means even if it is $1. Most of the $100 notes are seen in India when we need to exchange it.

 

[sud98]

As I understood, the RBI can not print and circular the money as it wish. First thing it can print money only against the old notes destroyed, it means that total currency rotation in the country shall be same always. The value of the currency (piece of paper) printed offset by keeping aside equal amount(or some percentage) of Gold in reserve in the Reserve Bank. It is mandatory. That is what the Govverner of RBI promises on the note that He will pay you the value of Rs............. so against present of that note. The reserve gold can not utilised by the Government for any other reason. So, in practical, there is a reserve of tons of Gold in the RBI against the money in circulation at present.

Same case applies to currency in all the Countries. That is the the reason, you can exchange your money to any foreign currency valued against the Gold price on the day. Otherwise, there is no way, you can exchange for foreign currency.

The Reserve bank can print the notes and keep in stock(That to for some ratio of total circulation in country may be around 3% and also to the extent it will get the old notes), but can not circulate it unless the sl. no. is registered in a registry, old note destroyed/gold reserve provided. Till the Note sl. No. enters in the registry, it will be piece of paper, but once it is registered it will get value and released for circulation. Sl. No. registration (in the book provided) is a critical stage of the release of currency, it is maintained since the rule of British, and still followed very carefully under very high supervision and security. It is like a "Praana prathistapana" for the Stone, which will become God.

In the present situation, everybody complain that, why the government has not printed enough notes for circulation, in advance, before demonitising it. In reality, the Govt might have printed(as per the ratio permitted), but it can not circulate till the old notes are reached back the RBI, registered once again, destroyed and allow new release. As fast as the people surrender their old money, that much fast the RBI releases the new notes.

Some part of its true, but not entirely.

All countries decided to move away from the gold reserve based backing of currency from 1971 known as the Bretton Wood system.
https://en.wikipedia.org/wiki/Bretton_Woods_system

Since, there is no official backing of a reserve, the central bank can back it up with other reserves like the USD or a mix of currencies that for example, India uses.

Each note is considered as a liability, which the central bank and the GoI takes the liability to pay, and hence affects the fiscal deficit of the country.

While there are a few tools that Central Banks to spur growth or curb inflation, one of the more popular tools (in India atleast) has been money supply (read about M0, M1 and M2 if you are interested). Typically, during high inflation, the RBI would increase rates, which means lower lending and hence try and curb inflation and vice versa.

There are other tools like decreasing tax rates, increase govt. spending or so that govt. uses to similar effect.

So the printing cost of the currency doesnt matter as its more like IOU issues by the govt.

To the second point raised by the OP about Rs. 2000 notes. They did anticipate that with all the curbs, there will be a shortage of currency and hence wanted to replace that with the largest possible note, so that they have to replace it with lesser notes. The second theory was that Rs. 1000 issued more than 10 years back based on inflation should be around Rs. 2000 by now.

Hope it helps the understanding.