1. Exchange Rate:
What ,Why and
How
Abhishek Nayak
Under-graduate , Dept of Electrical Engineering
11115003

2. History
• Money is any object of value that is
generally accepted as payment for goods
and services and repayment
of debts within a market
• From livestock and sacks of cereal grain to
cowries(sea shells) to beads to currently
used paper and metal currencies.

3. BARTER
• Barter is a system of exchange by
which goods or services are directly exchanged
for other goods or services without using
a medium of exchange .
• May be Bilateral or multilateral.

7. Limitations of barter
• Need for presence of double coincidence of
wants:
• Absence of common measure of value:
• Indivisibility of certain goods:
• Difficulty in storing wealth:

9. • Money, in and of itself, is nothing.
• The value that people place on it has
nothing to do with the physical value of the
money. Money derives its value by being a
medium of exchange, a unit of
measurement and a storehouse for
wealth.

10. COINS and CURRENCY
• In 600 B.C., Lydia's King Alyattes minted
the first official currency. The coins were
made from electrum, a mixture of silver
and gold that occurs naturally, and
stamped with pictures that acted as
denominations
• In 600 B.C., the Chinese moved from
coins to paper money

11. • Eventually, the banks (primarily in
Europe) started using bank notes.
• These notes could be taken to the bank at
any time and exchanged for their face
values in silver or gold coins.

13. GOLD Standard
• From 1821 to 1914 most of the world’s
currencies were redeemable into GOLD.
• Britain was the first to adopt this method in
1821.
• Then it had fixed 1£ at ¼ of 1 ounce of
gold.

15. • However after 1932 (End of the first great
economic depression) USA was the only
country to still have pegged its currency to
Gold Standard
• Most european countries started a floating
system .

17. Gold was still pegged at 35$ per ounce.

20. Smithsonian Agreement
• 1972
• Gold Backing had decreased (war
spending)
• US chose to suspend Dollar convertibility
to Gold.
• A year later most pegged currencies
reverted back to floating system.

21. Floating vs. Fixed
• A fixed exchange rate denotes a nominal
exchange rate that is set firmly by the monetary
authority with respect to a foreign currency or a
basket of foreign currencies.
• By contrast, a floating exchange rate is
determined in foreign exchange markets
depending on demand and supply, and it
generally fluctuates constantly.

22. Around 180
official
currencies
of 196
nations.

23. HOW

25. What determines EXCHANGE
RATE
• 1. Differentials in Inflation
• 2. Differentials in Interest Rates
• 3. Current-Account Deficits
• 4. Public Debt
• 5. Terms of Trade
• 6. Political Stability and Economic
Performance

27. Sources
• www.bloomberg.com
• www.cia.gov/library/publications/the-world-
factbook
• www.wikipedia.org
• www.howstuffworks.com