"Currency parity is ...", or A little bit about international finance

As you know, between the currencies of different countries under the influence of supply and demand are established buying and selling rates. However, the exchange rate is formed not only under the influence of market forces - in this case the rate would be too unstable. The basic ratio of the values of currencies determines the so-called parity - this is the core that restrains the movements of the foreign exchange market within reasonable limits. We will talk about what this is, in this article.

First of all, it should be said that in non-economic terms parity is a complete equality of positions (for example, parity of states concerning the power of armaments, positions on the international arena, and so on). It is obvious that the concept of "parity" in the meaning of "equivalence" can not be applied to the foreign exchange market , because in the world there are no two currencies with the same value. Therefore, it is generally accepted that currency parity is a basic ratio of the values of two currencies, determined on a legislative level, on which the exchange rate is built, which, in turn, can be changed under the influence of the market forces, but within the limits established by the regulator. The definition and legislative establishment of currency parities is one of the most important stages in the formation of the state's monetary system and is influenced by both internal and external factors.

There are various ways of forming currency parities. Earlier, the base for determining the relationship between the currencies of different states was the volume of gold (later - gold-dollar) reserves of the treasury. However, the crisis of the seventies showed that gold and US dollars are more incapable of performing the functions of the world's equivalent, since gold by that time had become, in fact, a commodity, rather than a form of money, and the dollar was simply not provided, as was clearly demonstrated at the time of France American currency to be exchanged for gold. That is why today the currency parity is determined by the ratio of the countries' special drawing rights - an artificially created IMF and a group of the World Bank currency, which gives the right to a state to receive a loan on it. The number of SDRs owned by a country is determined by its quota when it joins the IMF (calculated on the basis of the number of people, indicators of the national accounts system, global market positions, and so on), as well as annual membership fees to the treasury of this organization.

One interesting theoretically, but difficult to implement in practice ways of finding the relationship between the monetary units of different countries is the definition of such an indicator as the purchasing power parity of currencies. This method is a finding the relationship between the prices of identical goods in two countries. So, one of the most famous types of PKS is the "Big Mac Index", which is located as a private division of the values of the world-famous hamburger in McDonald's restaurants in different countries. Thus, purchasing power parity is an indicator that, on the one hand, shows a difference in the real purchasing power of currencies, but, on the other hand, does not take into account such differences between national economies as the cost of resources, the level of wages, and so on. As it is known since the time of Ricardo, the differences between the real values of goods are the basis for determining comparative and absolute advantages, and the theory of PCS suggests that the real cost of the product in different countries is the same, which refutes the theory of Riccardo, which proved itself in practice. Thus, today legislatively determined parity is the only way of more or less adequate regulation of national currency systems.