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Money and credit - Ivanov V.M.

13.2. Exchange rate

The exchange rate is the price of the monetary unit of one country, expressed in monetary units of another country, in sales transactions. Such a price can be set based on the ratio of supply and demand for a particular currency in a market environment or can be strictly regulated by a decision of the government or its main financial and credit institution. This body performs such important functions:

• internationalization of monetary relations (an integrated global system of money is being created);

• comparison of price structures and results of the reproduction process of individual countries (comparison of labor productivity, production costs, wages, balance of payments);

• Comparison of the national and international value of goods in the national and world markets. On its basis, national costs are compared with socially necessary international labor costs;

• redistribution of the national product between countries that carry out foreign economic relations.

The basis for determining the exchange rate is the ratio of the purchasing power of different national currencies. The purchasing power of a currency is expressed as a unit of goods and services that can be purchased for a monetary unit, compared with the base period. Distinguish between absolute and relative priorities of purchasing power (PPP).

Absolute PPP - the ratio between two currencies, which equalizes their purchasing power in relation to a specific set of goods and services.

Relative PPP is a derivative of the exchange rate in the base period, deflated by the ratio of price increases in countries of comparable currencies. The basis of this indicator is the market exchange rate, which, however, allows you to level the effect on the change in the rate of non-price, often purely speculative factors.