Researching the free market, economists came to the conclusion that money is not a constant. While $100 are worth the same amount of money every year, their real value constantly changes. Consumers can purchase a different amount of products on this money because its purchasing power depends on many factors. Prices rise and fall, the amount of money in circulation changes, new governmental policies come into force, and speculations take place – all these factors change the purchasing power of money.
Devaluation is an official lowering of the currency value as compared to the foreign currency. It happens due to the actions of the government or central bank. Depreciation is a similar process, however, it happens due to the conditions in the market. Inflation changes the value of money if fewer products and services can be purchased for the same sum. All these processes sufficiently lower the value of money either on domestic or on the international scale.
Therefore, the value of the dollar can be measured in comparison to the foreign currency. The exchange rate is created according to the current supply and demand in the market. Next, it can be measured by foreign exchange reserves. The more dollars international governments hold, the higher is the value of the currency. The value of dollar slowly declined since 1913. Almost a century ago, consumers could buy much more goods for $1 than they do today. Similarly, the supply, level of output, and conditions on the global market changed immensely for the last century. Consumers constantly feel how the value of money changes as they have to purchase essential goods such as grocery or petroleum every day.