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Two Different Theories Explaining How Currency Exchange Rates Are Determined and Their Relative Merits Essay

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Below is an essay on "Two Different Theories Explaining How Currency Exchange Rates Are Determined and Their Relative Merits" from Anti Essays, your source for research papers, essays, and term paper examples.

Two of the theories that explain how currency exchange rates are determined are the law of one price and purchasing power parity. The law of one price states in a competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell at the same price when their expressed in terms of the same currency (Hill, 2013, p. 232). If the same product is the same cost in the US and in England, relative to the exchange rate, then one country has an advantage to earn profits from purchasing the product from the other country. In the country with the higher-price supply is increasing and at the same time decreasing supply with the lower price. If demand remains steady, the increased supply in the country with the higher price will actually decrease price. In the country with the lower supply, prices will increase. If people buy the lower cost product from the country selling it, this will increase their demand. If supply is steady to both countries, prices increase, and the country that sold product at higher price will see a decrease in demand, and price. One price for one good in both places is usually immediate. Purchasing power parity allows two countries to estimate the exchange rate between their two currencies based on the purchasing power of the two countries’ currencies. A certain amount of a countries currency has equal value for direct purchases or utilizes the conversion towards the other country and purchases using that currency. A benefit from these exchange rates is eliminating confusing global assessments, which arise due to the utilization of market exchange rates. If two countries produce the same quantities of a product within the same time, the gross domestic product of a country is calculated against its own currency and then is converted to another country's currency using market exchange rates, the conclusion could be that one country has a higher or lower real gross domestic product than the...

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"Two Different Theories Explaining How Currency Exchange Rates Are Determined and Their Relative Merits". Anti Essays. 9 Dec. 2018

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Two Different Theories Explaining How Currency Exchange Rates Are Determined and Their Relative Merits. Anti Essays. Retrieved December 9, 2018, from the World Wide Web: http://parimatchstavki7.com/free-essays/Two-Different-Theories-Explaining-How-Currency-599505.html