Purchasing power

Purchasing power parity- when the currency are set by international markets changes will based on the actual purchasing power of the currency 

Ex. If the U.S. Dollar to the euro rate is 1.5 to 1 then each 1.50 will buy one euro 

However if a item in the U.S. Cost a dollar a 1.50 the cost more and less than 1 euro then the parity is lost

Markets will adjust quickly in floating rates . Or pressure for change will change in fixed rates 

Why do we exchange currency 

1. 

2. Invest in other countries stocks and bonds 

3.build factories or stores in other counties

4. Speculate on currency values

5. To hold currency in bank account for future imports and exports in future loans 

6. Control excessive imbalances