Money is simply any item used to pay for goods and services. Over history, money has taken different forms including gold, copper, coins, beads, salt, stones, and the most recent one virtual currency.
On the other hand, finance refers to the study, creation, and management of money. It also involves the process of finding someone or a business. Typically, money is the coin or debit card in your bag while finance is a wider term that includes money and loans.
The functionality of the two terms also differs. In this article, we will discuss the various factors affecting money and finance. You can also see this link https://steadmondfinance.com.au/ to find more information.
- Economic growth
The state of a country’s economy contributes hugely to the strength of the nation’s currency. The higher the growth rate the higher the demand for goods and services.
This also produces more jobs and increased incomes. Better wages improve the living standard of workers and allow more room for investments. More growth attracts foreign investment as well which plays an important role in enhancing the local currency.
On the other hand, a decrease in GDP growth may lead to an economic recession, which could affect the strength of the country’s currency. Keep in mind that strong economic growth could signal higher inflation rates and increased interest rates too.
- Inflation
An increase in demand for goods and services may lead to a rise in their prices, hence causing inflation. consumers suffer a lot when the prices of commodities increase.
This is why countries need to maintain a moderate increase in inflation. The central bank is responsible for regulating the inflation rate in every economy.
For instance, if a county experiences a high inflation rate, the central bank will lower the prices of items and enhance access to cheap credit with an increase in interest rates.
In a growing economic environment, an increase in interest rates leads to an increase I the currency value. This in turn attracts more traders to invest in the country.
- Current Account Balance
The current account balance of a country will tell you more about its cross-border transactions. Simply, it is what a country gets after adding the total amount of income, the number of goods and services, and the current money transfers against all of its trading partners.
A high current account balance shows that a country lends more than it borrows from its trading partner, while a low current account balance signifies that the country gets more credit from its trading partners than it lends.
Similarly, a high current account balance shows that there is a high demand for goods and services by traders and this impacts the country’s exchange rate positively.
- Interest rates
Interest rates have a great impact on a country’s currency. They may weaken or strengthen the currency depending on how high or low they get.
The central bank is responsible for the rise or fall of interest rates, where it may increase the rates to stimulate the economy or bring them down to moderate the economy.
High-interest rates are meant to limit borrowers while lower interest rates impose cheaper fees to attract more borrowers. Click here to read a few basics about money.
Conclusion
Money and finance are both very much co-related. They both hold the growth of a country’s economy much more than you can imagine. An increase in exchange rates increases the capital gains and the buying power of income. This increases the number of investors willing to invest in various sectors. Be sure to dig deeper and understand how money and finance influence the rate of returns on investment and other factors such as inflation, and interest rates.