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Does this mean that people are actually paying for bitcoins or that, based in bitcoin's own systems they are worth more than $1?

Those are prices that people are buying and selling bitcoins at. Many thousands are traded every day on mtgox.com alone.

I think it's the exchange rate - you can buy 1 bitcoin for $1.

I see a lot of people basically saying this same thing. It seems to me though the real question is how easily can I sell my bitcoin for a dollar?

To me at least that seems more defining as a currency rather than simply say a digital good.