Balance of Payments, Determining Foreign Exchange Rates and Parity Theory (220 words)

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Question

In your own words, contrast the balance of payments approach to determining foreign exchange rates to the parity condition theory.

Your response should be at least 200 words in length. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.

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Under the parity method of exchange rate determination, the exchange rates are determined on the basis of the purchasing power of the currencies...

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