Purchasing Parity:

When the currency rate is set by international market, changes will be based on the actual power of the currency

- For example: If the U.S. Dollar, to the European euro is a dollar fifty to one, then each one dollar and fifty cents will buy one euro. However, if an item in the US costs a dollar fifty, and then cost more or less than one euro, the parity is lost. Markets will adjust quickly in floating rates or pressure for change will occur in fixed rates

Why do we exchange currencies?

1. To invest in other country's stocks and bonds

2. To sell exports and buy imports

3. To build factories or stores in other markets

4. To hold currencies in bank accounts for future imports, exports, or business loans

5. To speculate on currency values

6. To control excessive imbalances, which come from

Absolute Advantage v. Comparative Advantage

Absolute Advantage

- Individual exists when a person can produce more of a certain good/service than someone else in the same amount of time

- National exists when a country can produce more of a good/service than another country can in the same time period

- Faster, more efficient

Comparative Advantage

- Individual/National: exists when an individual or nation can produce a good/service at a lower opportunity cost than can another individual nation

- Lower opportunity cost

Input Problems v. Output Problems

Input Problem: Any time you need to distinguish the difference, the country or individual that uses the least amount of resources, land or time, has the absolute Advantage. Least amount of resource, land or time

Output Problem: the country or individual who can produce the most had the absolute advantage. The country or individual with the lowest opportunity cost has the comparative advantage in that product. Always keep in mind this always deals with production.