ABSTRACT
Exchange rates play an important role in international trade and fi nance because they determine the international value of domestic resources. Classical trade theory suggests that only relative prices matter, i.e. that comparative advantage comes from relative domestic resource costs and does not depend on the nominal comparison of the value of currencies. If we lived in a simple global barter economy, this would be true-–only physical goods would circulate between countries, converted to local
currency prices on arrival. This was more likely in ancient trade, but the desire to carry purchasing power (fi nancial capital) across borders is also very old.
