The Top Ten Management Primer on Prices and Exchange Rates: An Analysis of How and Why Prices of Goods Vary Around The World

This review of the top ten things you need to know about Prices and Exchange Rates was prepared by Christopher Eugene while a Business Administration major in the College of Business at Southeastern Louisiana University in Hammond, Louisiana.

Introduction

The Foreign Exchange Market is a very important part of the international business world.  One of the more important aspects of the Foreign Exchange Market is the Prices and Exchange Rates of other countries.  The rates are intricate in promoting trades between two or more countries.  Here are some topics of the prices and exchange rate part of the Foreign Exchange market.

The Idea in a Nutshell

The concept concerning the prices related to exchange rate movements is greatly revolved around the theory of purchasing power parity.  It is the idea that they’re different rates and prices for trading goods for every country in the world.  There is also the Law of One Price that is greatly related to the prices and rates.

The 10 Things You Need to Know About Prices and Exchange Rates

1.  The first topic to discuss about the prices and exchange rates is The Law of One Price.   The law of one price states that in competitive markets free of transportation costs and has barriers on trades that the same products sold in different countries must sell for the exact price depending on the currency of the country.  That means if you are trying to sell a shirt in New Orleans for 5 dollars then if you were trying to sell that exact shirt in Mexico you would have to sell it in pesos.

2.  The purchasing power parity exchange rate shows if the prices of the identical products in different currencies were efficient for the country.   An example of this would be if the shirt would sell for 5 dollars in New Orleans but sold for 25 pounds in London then it wouldn’t be efficient.

3.  Efficient markets have no impediments to the free flow of goods and services.  This means that there are no trade barriers or great price differences depending on which form of currency is used.  It also states that the price of basket goods, which are goods that come in bulk, should be equivalent in each country.

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  1. Probably the most important reason to do business with other nations. This is where most companies save money and bolster their returns and create competition in a market that you have an edge in.

  2. In today’s increasingly interdependent world economy, it’s interesting to see how economies of scale are supporting the law of one price. If an economy is efficient, it’s operating at the greatest possible output for the lowest possible per unit price and selling products at that price to consumers. If there are no barriers to trade and countries don’t feel that their jobs at home are threatened, every single person benefits from an efficient market. Exchange rates can positively or negatively affect the prices in particular countries rendering the system inefficient and the prices unequal. Since the market is dynamic and constantly in flux, the law of one price is, at this point, only an ideal.

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