Mint parity. What Is Mint Parity Theory And How Will Its Rate Be Determined? 2022-10-29
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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.
What Is Mint Parity Theory And How Will Its Rate Be Determined?
They are: i Mint Par Theory, ii Purchasing Power Parity Theory, and iii Balance of Payments Theory. Thus, the value of each coin gold or silver will depend upon the amount of metal gold or silver contained in the coin and it will freely circulate between the countries. The rate of exchange showed that one pound of England contained as much fine gold as 4. The PPP or mint parity theories, on the opposite, could correct BOP disequilibrium through deliberate policies to cause inflation or deflation. In California loans are made or arranged by Intuit Mortgage Inc.
[PDF Notes] What is the Mint Parity Theory of Rate of Exchange? 2023
It remained so long as the monetary laws of the country remain unchanged. 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. Consequently, the actual rate of exchange between two currencies could vary above and below the mint parity by the extent of cost of gold export. This will lead to a proportionate increase in price level in the home country in the long run. With the abolition of gold standard this theory has lost much of its significance.
The Mint Par Theory of determination of Exchange Rates
Thus, the market rate has to fluctuate between Rs. In a country which is on gold standard, the currency is either made of gold or is convertible into gold at a fixed rate. Let us assume that both USA and India are on gold standard. . And the equilibrium will be restored conceptually in this situation when the country gaining gold finds its money supply increasing and prices and incomes rising, while the reverse will happen in the case of a gold exporting country.
What is the Mint Parity Theory of Rate of Exchange?
The mint par between these two countries was pound, one of England+4. In other words, the exchange rate is determined by the gold equivalents of the currencies involved. The changes in prices induce the changes in exchange rates. For instance, if the Reserve Bank of India increases the supply of money by 20 percent, it may cause a 20 percent rise in price level and 20 percent depreciation of rupee relative to, say dollar, over the long period. With its over-simplifying assumptions, it can neither exactly measure the rate of exchange nor can make a precise forecast of it over future period. This exchange rate is also known as mint rate. It means this theory, unlike PPP theory, does not restrict the determination of rate of exchange only to merchandise trade.
In other words, the rate of exchange between the gold standard countries is determined by the gold equivalents of the concerned currencies. While gold sovereign Pound contained 113. Merits: The balance of payments theory of rate of exchange has certain significant merits. But it cannot rise beyond the gold export point or fall below the gold import point, because at these points the demand for and supply of foreign exchange pound in our illustration becomes perfectly elastic by the outflow or inflow of gold. If the price level in India B has risen between the two periods at a relatively lesser rate than in the U. The price variations are likely to have more widespread destabilizing effects compared with the variations in exchange rates.
The mint par between these two countries was pound, one of England+4. . In the above expression, R 1 is the rate of exchange in the current period and R 0 is the rate of exchange in the base period or the original rate of exchange. Determination of Exchange Rate: The mint parity theory states that under gold standard, the exchange rate tends to stay close to the ratio of gold values or the mint parity or par. How to calculate Mint parity between US and India? It emphasises that the rate of exchange is influenced, in a significant way, by the balance of payments position of a country. Thus, exchange rate may rise upto OU or fall upto OL. Further, let one dollar be equal to 80mg of gold, and let one rupee be equal to 2mg of gold.
The portfolio balance approach brings trade explicitly into the analysis for determining the rate of exchange. The demand for foreign exchange and supply of foreign exchange arises from the debit and credit items respectively in the balance of payments. But this would involve cost in the form of packing, freight and insurance charges. If he imports gold he has to incur the cost of freight and insurance, etc. ADVERTISEMENTS: For the determination of the par values of different currencies, alternative theoretical explanations have been given.
If there are changes in demand or supply or both, the rate of exchange will be accordingly influenced. Thus, under gold standard conditions the exchange rate tended to stay close to the ratio of gold values of the currencies or mint parity. In fact there are serious imperfections in the market on account of trade and exchange restrictions imposed by the different countries. This exchange rate signifies U. Empirical Tests of the PPP Hypothesis: Despite weaknesses of both the absolute and relative versions of the PPP theory, the assumptions of this theory are central to many a model. It is assumed that initially the foreign exchange market is in equilibrium or at interest parity. The variations in aggregate income and expenditure that can have effect upon the foreign exchange rate through their effect upon the volume of foreign trade were completely overlooked by this theory.