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If we want to figure out the strength of a currency relative to another currency, we look at the exchange rate between the two. However, I'm wondering what is the most accurate way of assessing the absolute value of a currency?

I suppose commodities or gold could be used, but there can be variations on the value of those over time (i.e if there is a new use for gold in electronics, the value is obviously going up.) So have economists found a better way?

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  • $\begingroup$ What does "absolute value of a currency" mean to you? $\endgroup$
    – 410 gone
    Jun 9 '16 at 8:38
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I don't think absolute value exists. Every valuation is relative, because these valuations are made by people/by the market. For example: if you'd offer the choice between a ferrari and an icecream to a little kid, the kid might choose the icecream. If you'd offer the same choice to an adult, the adult would probably choose the ferrari. But maybe the adult is very rich, and he already has 10 such ferraris, so he doesn't care and chooses the icecream cause he's very hungry at the moment...

Also with currencies, absolute value doesn't exist, only value relative to other things. I do think that gold/silver are possibly the best measures for currency-value. Everyone always talks about gold going up or down in currency-value. I think we should take a different approach and talk about currency going up or down in gold value cause gold can't be created ad infinitum and at almost no cost.

I don't think that measuring one currency against another has any merit... both currencies can be printed at will. It's like measuring length in centimeters, but every day there are more centimeters in one meter...

So no, in my opinion there's no better way, cause absolute value doesn't exist here...

Anyway, the Austrians have a lot to say about 'subjective value': https://mises.org/library/subjective-value-theory

best regards

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  • $\begingroup$ why is this getting downvoted? Some feedback would be nice... $\endgroup$
    – tibo
    Jun 9 '16 at 16:58
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    $\begingroup$ I think it was a good answer. I guess I was wondering if there was some sort of index that measures currency vs. a group of goods that don't change in value (maybe gold or a loaf of wheat bread.) That way, I can look at a graph to see how the USD, Yen, and GBP are doing against eachother. Actually, I think I've found the term I'm looking for: Purchasing power parity. $\endgroup$ Jun 10 '16 at 6:22
  • $\begingroup$ Thanks, I'll check the purchasing power parity. If you want an index of currency vs goods, maybe you could try the CRB? en.wikipedia.org/wiki/Thomson_Reuters/Jefferies_CRB_Index $\endgroup$
    – tibo
    Jun 10 '16 at 8:36
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Actually there is an effort by IMF that indirectly offers a common unit of measurement to express the value of the major world currencies homogeneously.

It's called SDR (Special Drawing Rights) sometimes abbreviated as XDR. It's a sort of meta-currency whose value is calculated as follows:

The value of the SDR in terms of the U.S. dollar is determined daily and posted on the IMF’s website. It is calculated as the sum of specific amounts of each basket currency valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

The basket composition is reviewed every five years by the Executive Board, or earlier if the IMF finds changed circumstances warrant an earlier review, to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems IMF website

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If all you care about is looking at changes in a given currency and not relative to others, just look at how the purchasing power changes over time. By this, I mean you can pick a basket of goods and then see how much currency is required to purchase that particular basket.

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