The nominal foreign exchange rate of a fiat money tends to converge the purchasing power parity (PPP) of this country or region.
The PPP is regularly scaled by means of some commonly traded goods across the borders in the world.
Either the classical economics case or the modern economics case applies to the foreign exchange rate change depending on time, place, and occasion.
- The case base on the Classical Economics
According to the classical economics, the aggregate demand (AD) is fluctuant while the aggregate supply (AS) is rigid in the short run so that the output level of an economy is rigid.
The classical economics regards highly of repressing the price inflation rate and maintaining the prudent demand management.
In terms of the macroeconomic management, the high AD means the overheat of the economic activities which should be repressed whereas the suppressed AD implies the prudence.
The price inflation is considered as the excess money supply circulated into the economy which reduces the nominal FX rate relative to the other currencies.
The price of the commonly traded goods therefore becomes more expensive so their PPP goes down.
- The case base on the Modern Economics
By contrast, the modern economics regards that the output level can be fluctuant at least in the short run because the higher price encourages the suppliers to produce more.
The macroeconomic policy of the modern economics indicates that the price and the output may rise together enough to increase their productivity level competing against the other economies i.e. the PPP.
Then, the price of the commonly traded goods tends to be negatively correlated
to the PPP often derived from multiplying the price level and the
output level.
The correlation of the price level and the PPP depends on whether it is caused by the AD (the positive correlation) or the AS (the negative correlation).
This factor induces the nominal FX rate because the traders then always speculate which correlation is dominant over the counterpart.
Furthermore, the central bank often intervene into the FX market with their money supply control to control their AD and SRAS: The FX rate change tends to negatively affect on the good market but positively affect on the financial market.
The effect of this intervention to the FX depends which market factor, goods or finance, is more dominant over the counterpart so this causes the FX market all the more speculative.
- Marxist perspective against the global capitalism
Judging from Marxian economics, this whole theory is nonsense because the capitalist system including this FX market function favours the bourgeoisie, the capitalist class, to exploit the proletariat, the rest majority.
The bourgeoisie take an advantage of owning various means of productions increasing their purchasing power in the trade meanwhile the proletariat do not capital but their own physical labour (including the white collar works using their brain) and time.
The socioeconomic conflict of these two classes, the bourgeoisie and the proletariat, also applies to the relationship between the already developed countries and the developing countries including the emerging countries and the least developed countries: The former ones own the higher level of capital whilst the latter ones own only few resources such as labour and natural resource.
In addition, Marxian theory claims that the market mechanism often neglects taking some external factors hardly shown in account books such as the exploited labour value and the ecological footprints such as excess extraction and pollution.
All in all, the power balance of the foreign exchange market is asymmetrically distributed among countries, which perpetuate the exploitation of the poorer countries by the richer countries.
According to Marxian socio-economics, these goods and services in the world should be collectively distributed across the borders purely by means of their needs so this over-fluctuant speculative FX market is nonsense to take into consideration.
Perhaps, Marxian scepticism can be true after having observed the wealth and educational gap between countries and the ongoing environmental damages in the developing countries.
However, the collective distribution planning requires an unfeasibly gigantic bureaucracy administrated by a single world government body managing as well ass monopolising the entire world economy.
- The alternative transformation
As having learned from the last Marxian economic experiment by the USSR, the collectivist economic policy is risky due to its inefficiency of distribution and decision making processes as well as the excess centralisation of the political power.
The feasible way to take this Marxian claim is to establish some positive intervention mechanism into the current market economy.
For instance, the foreign direct investment programmes with a fixed FX rate contract for a certain contract period should be implemented to aid these relatively less developed countries.
In particular the LDCs, they tend to lack their own physical and human resources available to split to their research and development (R&D) so the foreign aid is crucial to grow enough to participate to the international trade in a fair competition.
Enriching the LDCs is actually beneficial for the developed countries providing the aids because it means to increase both customers of their products produced by the developed countries and suppliers of products with higher values added for the developed countries.
The FX mechanism of the market economy should remain as the automatic adjustor corresponding to the spontaneous market changes while introducing some positive intervention encouraging the fair trade and the product variety which will expand the market potential of the entire global economy.
