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The Mint Power Parity Theory

The Mint Power Parity Theory describes how exchange rates were determined under the international gold standard system. Currencies were defined by and convertible to gold at fixed rates set by each country's central bank, called the mint price. The normal exchange rate between two currencies equaled the ratio of their mint gold values. However, the actual exchange rate could fluctuate above or below the mint parity due to transportation costs of shipping gold between countries to balance trade deficits and surpluses. The exchange rate was kept within an upper and lower boundary determined by the gold shipping costs.

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336 views1 page

The Mint Power Parity Theory

The Mint Power Parity Theory describes how exchange rates were determined under the international gold standard system. Currencies were defined by and convertible to gold at fixed rates set by each country's central bank, called the mint price. The normal exchange rate between two currencies equaled the ratio of their mint gold values. However, the actual exchange rate could fluctuate above or below the mint parity due to transportation costs of shipping gold between countries to balance trade deficits and surpluses. The exchange rate was kept within an upper and lower boundary determined by the gold shipping costs.

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vivek2270834
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The Mint Power Parity Theory The mint Power 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 U.S. price of gold $36 per ounce, they were the mint prices of gold in the respective countries. The exchange rate between the dollar and the pound would be fixed at $36/6 = $6. This rate was called the mint parity or mint power of exchange because it was based on the mint price of gold. Thus under the gold standard, the normal or basic rate of exchange was equal to the ratio of their mint power values (R = $/). 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 USA has a deficit in the balance of payments with UK. This difference between the value of imports and export will have to be paid in gold by USA importers because the demand for pounds exceeds the supply of pounds. But the transhipment of gold involves transportation cost and other handling charges, insurance etc. Suppose the shipping cost of gold from USA to UK is 3 cents. So the US importers will have to spend $6.03 ($6 + 0.3c) for getting 1. This could be the exchange rate which is the US gold export point or upper specie point. No US importers would pay more than $6.03 to obtain one pound because he can buy $6 worth of gold from the US treasury and ship it to UK at a cost of 3 cents per ounce. Similarly the exchange rate of the pound cannot fall below $5.07 in the case of surplus in the US balance of payments. Thus the exchange rate of $5.97 to a pound is the US gold import point to lower specie point. The exchange rate under the gold standard is determined by the demand and supply between the gold points and is prevented from moving outside the gold points by shipment of gold.

Purchasing-power parity theory - A theory which states that the exchange rate between one
currency and another is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent. In short, what this means is that a bundle of goods should cost the same in Canada and the United States once you take the exchange rate into account.

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