Revaluation of the Yuan
- Date: February 01, 2008
- Level: University, Master's
- Grade: Unspecified
- Length: 1 pages (299 words)
- Essay rating:
- Keywords:
exchange currencies, chinese yuan, accurate exchange, theoretical applications, chinese economy, mac index, ...relative prices, perfect system, law states, three dollars, purchasing power, revaluation, life situations, canadian dollars, canadian dollar, world today, discrepancies, exchange rate, exchange rates, notion
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Subject > History Term Papers > Asian History
In order for countries to trade they must be able to exchange currencies. The buying country must acquire the selling country’s currency in order to purchase goods. In order to determine at what rate one currency should be traded for another one must examine the notion of purchasing power. The idea that exchange rates should equal purchasing power is best illustrated by the following example. If a Big Mac costs three dollars in Canada the accurate exchange rate for the Chinese Yuan will be one that exchanges three Canadian dollars for the amount of Yuan it would take to purchase a Big Mac in China. If the Big Mac costs thirty Yuan then the exchange rate between the two countries ...
... Yuan will be one that exchanges three Canadian dollars for the amount of Yuan it would take to purchase a Big Mac in China. If the Big Mac costs thirty Yuan then the exchange rate between the two countries should equal ten Yuan for one Canadian dollar. The Big Mac example is one that is used in an exchange rate theory called the “Law of One Price”. This law states that: “the relative prices of any single good between countries, expressed in each country’s currency, is representative of the proper or appropriate exchange rate value. This would always be the case in a perfect system; however as is the case with many theoretical applications they
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