Friday, August 28, 2009
The Mint Par Parity Theory
The mint Par Parity theory is associated with the working of the international gold standard. Under this system, the currency in use was made of gold or was convertible into gold at a fixed rate. The value of the currency unit was defined in terms of certain weight of gold, that is so many grains of gold to the rupees, the dollar, the pound etc. The central bank of the country was always ready to buy and sell gold at the specified price. The rate at which the standard money of the country was convertible into gold was called mint price of gold. If the official British price of gold was £6 per ounce and of the
But the actual rate of exchange could very above and below the mint parity by the cost of shipping gold between the two countries. To illustrate this, suppose the
Following figure shows the determination of the gold exchange rate under the gold standard.
The exchange rate OR is set up at point E where the demand and the supply curves DD` and SS` intersect. The exchange rate need not be at the mint parity. It can be any where between the gold points depending on the shape of the demand and supply curves. The mint parity is simply meant to define the
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