• Paper money has little physical value, but it may represent a great deal of wealth.money,money,money image by Catabu from Fotolia.com
  
  For thousands of years, people have used currency to represent value and facilitate the exchange of goods and services. Currency, whether paper money, coins or simply a number in a bank's computer, is a representation of value that the users of that currency agree upon. Historically, there have been many different ways of valuing currency and methods for comparing one form of money to another.
  
  

Precious Metal Standards

• One of the earliest, and simplest, ways to value currency is by using a precious metal, such as gold or silver, as a standard. In ancient times, coins were sometimes minted directly from a precious metal with a stable, universally accepted value. Another type of currency standard involves a government that issues paper money and coins that are backed up be gold or silver deposits held by the government. Nations that use this method, as the United States did for much of its history, are referred to as being on the gold or silver standard. This means that anyone in possession of a piece of that nation's currency could redeem it for the appropriate amount of gold or silver at any time.
  
  While a precious metal standard allows a nation to have a stable currency that is guaranteed in value, it also places limitations on a treasury in terms of printing more or less money to control inflation or manipulate markets.
  
  

Relative Value

• Another way to value currency is by analyzing its relative value. This process compares the value of a currency at two different points in time, using the result to determine the value of a currency today relative to its value in the past.
  
  There are several distinct ways to compute the relative value of a currency. One is to look at what is known as a bundle. This bundle contains commonly-used consumer products and services. Economists combine the cost of each item in the bundle and compare the sum to that of the same bundle at a different point in time.
  
  Other methods for determining relative value are to consider gross domestic product, consumer spending or the average unskilled wage in a country. These numbers also fluctuate over time and trends can reveal whether the value of a currency is rising, falling or remaining stable.
  
  

Investment Value

• Finally, one of the most common ways to value international currencies is through an investment market where traders buy and sell currencies. Brokers and analysts compile huge amounts of data, including a country's inflation rate, economic and political stability, exports and import totals, employment rate and interest rates to determine whether a particular currency is likely to rise or fall in value. Brokers then use this information to buy or sell currencies, much like stocks in the stock market. The price a buyer is willing to pay becomes the accepted value of a currency, and changes over time as more or fewer buyers compete to purchase a finite amount of the same currency.