Download - Exchange rate
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Exchange Rate: What ,Why and
How
Abhishek NayakUnder-graduate , Dept of Electrical Engineering
11115003
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History
• Money is any object of value that is generally accepted as payment for goods and services and repayment of debts within a market
• From livestock and sacks of cereal grain to cowries(sea shells) to beads to currently used paper and metal currencies.
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BARTER• Barter is a system of exchange by
which goods or services are directly exchanged for other goods or services without using a medium of exchange .
• May be Bilateral or multilateral.
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Limitations of barter• Need for presence of double coincidence of
wants:
• Absence of common measure of value:
• Indivisibility of certain goods:
• Difficulty in storing wealth:
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• Money, in and of itself, is nothing.
• The value that people place on it has nothing to do with the physical value of the money. Money derives its value by being a medium of exchange, a unit of measurement and a storehouse for wealth.
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COINS and CURRENCY
• In 600 B.C., Lydia's King Alyattes minted the first official currency. The coins were made from electrum, a mixture of silver and gold that occurs naturally, and stamped with pictures that acted as denominations
• In 600 B.C., the Chinese moved from coins to paper money
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• Eventually, the banks (primarily in Europe) started using bank notes.
• These notes could be taken to the bank at any time and exchanged for their face values in silver or gold coins.
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GOLD Standard
• From 1821 to 1914 most of the world’s currencies were redeemable into GOLD.
• Britain was the first to adopt this method in 1821.
• Then it had fixed 1£ at ¼ of 1 ounce of gold.
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• However after 1932 (End of the first great economic depression) USA was the only country to still have pegged its currency to Gold Standard
• Most european countries started a floating system .
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Gold was still pegged at 35$ per ounce.
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Smithsonian Agreement
• 1972
• Gold Backing had decreased (war spending)
• US chose to suspend Dollar convertibility to Gold.
• A year later most pegged currencies reverted back to floating system.
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Floating vs. Fixed• A fixed exchange rate denotes a nominal
exchange rate that is set firmly by the monetary authority with respect to a foreign currency or a basket of foreign currencies.
• By contrast, a floating exchange rate is determined in foreign exchange markets depending on demand and supply, and it generally fluctuates constantly.
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Around 180 official currencies of 196 nations.
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HOW
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What determines EXCHANGE RATE
• 1. Differentials in Inflation
• 2. Differentials in Interest Rates
• 3. Current-Account Deficits
• 4. Public Debt
• 5. Terms of Trade
• 6. Political Stability and Economic Performance
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Sources
• www.bloomberg.com
• www.cia.gov/library/publications/the-world-factbook
• www.wikipedia.org
• www.howstuffworks.com
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