Tuesday, August 11, 2009

MECHANISM TO DETERMINE EXCHANGE RATE, SMART ZOMBI'S.

MECHANISM TO DETERMINE EXCHANGE RATE:
The mechanism of determination of exchange rate varies with the currency systems which may be as followed"

1: When both countries adopt gold standard.

2: When one country is on gold standard, and the other is on non convertible paper currency.

3: Both countries have non-convertible paper currencies.

These are defined as followed.


1: WHEN BOTH COUNTRIES ADOPT GOLD STANDARD:

When two trading nations are on gold standadr or their paper currencies are convertible into gold and silver, the exchange rate between their currencies would depend on the weight of gold contained in the coin. If a Pakistani coin contains two grams of gold and other country coin one gram, the exchange rate would be:

1 Pakistani coin = 2 coins of other country.

Or 1 coin of other country = 0.50 Pakistani coin.

Exchange rate thus determined is called as "mint par of exchange".
Gold standard allows free flow of coins among countries with it.


2:WHEN ON COUNTRY IS ON GOLD STANDARD, AND THE OTHER ON NON-CONVERTIBLE PAPER CURRENCY:

In such a case currencies of two trading countries cannot freely flow. They will settle their foreign debts through the bills of exchange. the rate will be determined on the demand and supply of their bills, whose demand depends on that of goods and services. High demand will put the rate of currency at a high level and vice versa.


3: WHEN BOTH COUNTRIES ARE ON NON-CONVERTIBLE PAPER CURRENCIES:

Here also the above method involving bill of exchange is used. In this modern world all countries run non-convertible paper currency systems. Under it payment in foreign trade is made through bill of exchange. If the goods and services have a good demand abroad, the demand for bill of exchange will consequently be high. High demand for the bill will fetch a high exchange rate for the currency. Because of poor demand for Pakistani goods, consequently the currency, and high demand for dollar, the exchange value of a dollar to the rupee in mid 1999 was Rs.50 and in 30 July 2001 the dollar value shot up Rs. 67.. Drop in the exchange rate is the indication of sustained negative balance of payment and other negative factors.

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