Mint parity. The Mint Par Theory of determination of Exchange Rates 2022-11-08
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Mint parity is a concept in economics that refers to the idea that the cost of producing a new unit of currency should be equal to the face value of that unit of currency. In other words, it means that the cost of producing a coin or a bill should be equal to the value that is written on it.
There are several reasons why mint parity is important. First and foremost, it helps to ensure that the currency in circulation is not overvalued or undervalued. If the cost of producing a unit of currency is significantly lower than its face value, then the currency will be overvalued, which can lead to inflation. On the other hand, if the cost of producing a unit of currency is significantly higher than its face value, then the currency will be undervalued, which can lead to deflation.
Mint parity is also important because it helps to ensure that the currency in circulation is consistent and reliable. If the cost of producing a unit of currency is not equal to its face value, then people may not trust the currency and may prefer to use other forms of exchange, such as gold or silver. This can lead to a lack of confidence in the currency and can ultimately destabilize the economy.
There are several factors that can affect the cost of producing a unit of currency and the ability to maintain mint parity. These include the cost of raw materials, such as metal for coins and paper for bills, as well as the cost of labor and other production expenses. The level of technology and efficiency in the production process can also play a role in the cost of producing a unit of currency.
In order to maintain mint parity, central banks and governments must carefully monitor and control the cost of producing their currency. This may involve adjusting the composition or design of coins and bills, as well as adjusting the amount of currency in circulation. By maintaining mint parity, central banks and governments can help to ensure that the currency in circulation is consistent, reliable, and not overvalued or undervalued.
[PDF Notes] What is the Mint Parity Theory of Rate of Exchange? 2023
To see why, we'll use an example. American consumers desire Mexico Pesos in order to buy baseball bats in Mexico. The expansion in money supply and consequent fall in the rate of interest will affect the financial markets and exchange rates immediately in the home country India. The changes in capital flow have significant bearing upon the exchange rate, through their effects upon the demand for and supply of domestic and foreign currencies. Similarly, when an exporter has to receive payment from the USA he has the alternative of either importing gold from the USA or getting the amount in US dollars and selling the dollars locally. It is, therefore, unrealistic to analyse the rate of exchange presently in terms of mint parities. For examples before World War 1 England and American were on gold standard.
It is further supposed that the monetary authority in the home country increases the supply of money. Criticism: The BOP theory of exchange rate is criticized mainly on the following grounds: i Assumption of Perfect Competition: This theory rests upon the assumptions of perfect competition and free international trade. A deficit in the balance of payments of a country signifies a situation in which the demand for foreign exchange currency exceeds the supply of it at a given rate of exchange. Dollar USD is currently selling for ten Mexican Pesos MXN on the exchange rate market. The price at which the standard currency unit of the country was convertible into gold was called as the mint price.
According to this approach, the demand for money depends upon the level of real income, the general price level and the rate of interest. When the currencies of two countries are on a metallic standard gold or silver , the rate of exchange between them is determined on the basis of parity of mint ratios between the currencies of the two countries. U and L thus, set the limit to a deviation of equilibrium exchange rate from mint parity. Although this theory can be traced back to Wheatley and Ricardo, yet the credit for developing it in a systematic way has gone to the Swedish economist Gustav Cassel. Balance of payments theory 1.
What is the Mint Parity Theory of Rate of Exchange?
In a country which is on gold standard, the currency is either made of gold or is convertible into gold at a fixed rate. It remained so long as the monetary laws of the country remain unchanged. In general, countries that have high PPP, that is where the actual purchasing power of the currency is deemed to be much higher than the nominal value, are typically low-income countries with low average wages. Further, it can be seen that a change in the supply schedule for dollars within the interval ZT or ad would simply result in a divergence of the exchange rate from mint parity; a shift in the demand for dollars within the range RQ or bs would similarly result in a deviation of the rate from mint parity. The portfolio balance approach is an extension of the monetary exchange rate models focusing on the impact of bonds.
While gold sovereign Pound contained 113. S is the positively sloping supply function of foreign currency. The Purchasing Power Parity Theory: The purchasing power parity theory enunciates the determination of the rate of exchange between two inconvertible paper currencies. Under the gold standard, the balance of payments adjustments were made through the free international flows of gold. The rate of exchange between the gold standard countries is determined on a weight to weight basis of the gold countries of their currencies. It is adjusted through the export of gold to Britain.
The Purchasing Power Parity Theory 3. Thirdly, this approach holds that domestic and foreign financial assets such as bonds are perfect substitutes. Secondly, under gold standard, there are specified limits beyond which the fluctuations in the rate of exchange cannot take place. Since gold could be freely bought and sold between countries, these gold points were determined by the costs of insurance, transportation and handling charges incurred in the shipment of gold. It may be difficult to locate such a base period because the given country might have been faced with a permanent BOP disequilibrium. .
Mint Parity Theory of Equilibrium Rate of Exchange
They also indicate that changes in exchange rate result in variations in relative prices that make it apparently impossible to construct price indices for which the Law of One Price will hold. ADVERTISEMENTS: The value of currency unit under gold standard was defined in terms of weight of gold of a specified purity contained in it. Fifthly, in its present form this approach does not provide a complete and unified theory of exchange rate determination that fully and consistently integrates financial and commodity markets in the short run and long run. The current or the market rate of exchange, however, fluctuated from time to time due to changes in the balance of payments of the respective countries. ADVERTISEMENTS: It is, of course, true that the purchasing power parity between the two currencies is determined by the quotient of their respective purchasing power. The Indian importer has two alternatives. This theory is valid where the countries are on gold standard.
The price at which the standard currency unit of the country was convertible into gold was called as the mint price. DD 1 and SS 1 are the demand and supply curves of foreign exchange. Thirdly, apart from the differences in quality and kind of goods there are also differences in the pattern of demand, technology, transport costs, tariff structures, tax policies, extent of state intervention and control and several other factors. The equilibrium market rate of exchange between dollar and pound sterling is determined by the intersection of DD 1 and SS 1 curves at E. Thus the exchange rate changes may induce the changes in price level.
Determination of Exchange Rate under Mint Parity Theor
The mint parity theory was severely criticized on the various grounds. So the mint par values of the two currencies determined the basic rate of exchange between them. Apart from the purchasing power, the rate of exchange is influenced by several other factors such as capital flows, BOP situation, speculation, tariff structures etc. The market rate of exchange is determined by the intersection of demand curve DD and supply curve SS of foreign exchange. It means the government does not resort to tariff or non-tariff restrictions upon trade.
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