10 December 2007

Exchange Value in scaled economies

It occured to me that it is possible to find a relation between purchase power and exchange value of a currency. This might already exist. But application of such a mathematical relation is amazing. It can become a tool to assess healthy value for a given currency.

This idea is based on the following.

1) There are many scaled economies trading using foreign exchange values of their currecies.
2) Purchase power for essential commodities in two scaled economies have to remian the same so exchange value of currency in other can be estimated.
3) If actual currency values are higher or lower its impact can be assed easily.

We can save energy of the experts who confuse us by giving contradictory assesments on say increase in Canadian dollar. Intution tells me that exchange value should be proportational to purchase power per fixed amount in a currency.

I . E. FEV = k * 1/ PPc

Two assumptions here are: a) PPc for two economies are same. b) Trade significantly (linearly) affects PPc.

This is very crude. But I will come up with something more concrete in the future.
~rAGU

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