Purchasing Power Parity

• when currency rates are set by international markets, changes will be based on neutral purchasing power of currencies
• U.S. $ to European Euro is 1.5 : 1
• each $1.50 will buy 1euro, however if an item in the U.S. cost $1.50 and then cost more / less than 1euro, the parity is lost
• markets will adjust quickly in floating rates, or pressure for change will occur in fixed rates

Reasons we Exchange Currencies

1. to sell export and buy imports
2. to invest in another country's stocks and bonds
3. build stories or factories in another country
4. speculate on currency values
5. to hold currencies in bank accounts for future exports / imports/ business loans
6. control excessive imbalances