Mint Parity Theory - History, Definition, Advantages and Disadvantages

This ppt includes Mint Parity Theory - History, Definition, Advantages and Disadvantages

1. Presented by BINDU A S 2nd M.Com MINT PARITY THEORY Under the guidance of Sundar B. N. Asst. Prof. & Course Co-ordinator GFGCW, PG Studies in Commerce Holenarasipura

2. This theory is associated with the working of the international gold standard (gold standard operated between 1880-1914) Under this system,the currency in use was made of gold or convertible into gold at fix rate. The value of one currency unit was definedin terms of certain weight of gold,that is, how many gains of gold is equal to onedollar or one pound etc. The central bank of a country was ready to buy and sell gold at specific price. The rate at which the standard currency of country was convertible into gold was called in mint parity/ mint price of gold . INTRODUCTION

3. History The earliest establishment of gold standard was in the united Kingdom in 1821 followed by Australia in 1852 Canada in 1853. Under this system the external value of all currencies was denominated in terms of gold with central banks ready to buy and sell unlimited quantities of gold at the fixed price. Each central bank maintained gold reserves as their official reserve assets.

4. Mint Parity Theory When the currencies of two countries are an metallic standard (gold or silver standard) rate of exchange between them is determined on the basic of parity of minorities between currencies of the two countries. Thus the theory explaining the determination of exchange between countries which are on the same metallic standard (say gold coin standard),is known the Mint Parity Theory of foreign exchange rate.

5. Definition A commitment to fix the price of domestic currency in terms of a specified amount of gold.

6. Example Since the mint parity is the reciprocity of the gold content ratio between the two currencies , the exchange rate between the American dollars and British sovereign ( pound ) based on mint parity, was 113.0016/23.2200,i.e.,4.8665. That means the exchange rate £ 1=4.8665 can be defined as the mint parity exchange between the pound and the dollar.

7. The international gold standard does not exist now ever since after 1930 The theory is based on the free buying and selling of gold and its movement between countries , while Govt. do not allow such sales or purchases and movement The theory is fails to explain the determination of exchange rates as most countries are on inconvertible paper currencies Criticisms on Mint Parity Theory

8. Advantages and Disadvantages Advantages Low transaction cost, since only accounting record need to be kept . Pay the role of stable lnternational unit of accounts Gold can be for saving, as it is wealth inself. Disadvantages the cost of manufacturing gold gradually increased to levels beyond the official prices. Countries with persistent trade deficit suffered from recessions resulting in reduced investments and unemployment.

9. Assumption of Mint Parity Theory It buys and sells gold in any amount at that price. Supply of gold or paper currency which backed by gold. There is movement of gold between countries. Capital is moveable within countries. Price directly varies with money supply.

10. Conclusion The mint parity theory has been discarded since the gold standard broke down now. There are neither free movements of gold parties.

11. Reference Mint Parity Theory of Equilibrium Rate of Exchange/ International Trade - Your Article Library Mint parity theory slide share pictures Theories of Exchange Rate Determination / International....