In International Monetary System What Is Fixed Exchange Rate System?

There is marked difference domestic trade and international trade. In international trade, the goods are not exchanged by barter but through the medium of money. For example, if Pakistani imports machinery from England, the English seller wants pounds and not Pakistani rupees. How will you concert and at what rate the Pakistani currency with the British pound. The government of each country here comes to their rescue and introduced a new element, the foreign exchange rate. The foreign exchange rate determines the price of foreign country's currency in terms of our own.

Fixed exchange rate system:
The import countries of the world were on gold standard from 1880-1913. Under the gold standard, the countries defined their currencies in terms of a fixed amount of gold. This established fixed exchange rates among the countries on gold standard, For example, before the World War 1. British pound contained ¼ ounce of gold and the USA dollar contain 1/20 ounce of gold. In this case the British, pound was 5 times as weighty rate of 5 pound to 1 dollar between the two countries is called the mint parity. The exchange rate in practice can vary in a narrow range around the mint parity because of transport and insurance casts involved in shipping gold from one country to another.