Improve Your Financial Literacy
Learn How The Economy Works
Most of the people have no idea on how the economy works. In fact the way economy works is so complex that it discourages almost everyone in trying to understand it's way of functioning.
Following is an excerpt from our financial literacy course, "The Second Book of Wealth: Financial Literacy":
How the economy works: The Fiat System
The fiat system is an exchange medium without any intrinsic value. It’s basically a unit of measure for the value and it’s value reflects the popularity of the currency. For example, if more people from Australia start to use US dollars as a currency, the value of AUD will decrease while the value of USD will increase, as they will sell AUD for USD. If the USD government takes some actions that are perceived as bad by the people in Australia that bought USD, they will sell USD for AUD or another currency. If the Australian government takes some actions that are perceived as good, more people will buy AUD and will give in exchange other currencies. This will increase the price of AUD.
On the other hand, because of all the international trade and because people very often travel from one country to another, there is a permanent exchange between currencies all over the world. If Australia starts producing more goods that are sold in US, they will be paid in USD. Some of the USD will be used to buy stuff from US, while the rest will be converted into AUD. If the amount of USD is sold for AUD, the demand of AUD will increase while the one for USD will decrease. This will increase the price for AUD and decrease USD.
In a fiat currency system, the value of a certain currency is the result of the demand and offer for that currency. Government regulations influence the demand and offer for the currency and can control the value of the currency (although very few governments manage to do this).
In the following section we will show you the basics of how present monetary system works, so that you will easily understand how money works and understand the laws of money.
The fiat currency system is basically based on debt. Because it’s based on debt, interest needs to be paid for each currency unit created. In today’s monetary system, the central banks have a crucial role in creating new currency and controlling the price stability and money supplies by means of monetary policy.Here is a 30 minutes video from Ray Dalio that explains in a very simple way how the economy works: