I’m not sure anyone can explain “exactly” why that is. I searched my butt off to come up with a set formula for exchange rates… it doesn’t exist. I even wrote to Jeffrey Frankel, Harvard professor about it. His response was… “According to traditional theory, exchange rates in the long run move in proportion to money supplies.”… but other factors do come into play.
I’m sure currency reserve levels and trade surpluses/deficits and other small contributors come into play.
But just looking at that GDP to money supply ranking that I put together shows that countries fall “basically” into line… and Iraq is “basically” right in line where they are. The money supply, or exchange rate could change by a factor of 2 or maybe even 3 and not be totally out of wack. Much more than that and you get some glaring discrepancies… especially if you start talking about 100’s of times larger, or even the 1170 times that would be required to get a 1:1 exchange rate.
Just a simple example…
Say SA has a GDP of $350 billion.
And Iraq grows to the same $350 billion.
And SA has 50 billion units of currency.
And Iraq has 50 TRILLION units of currency.
Then you would expect to see an exchange rate of 1 SA unit = 1000 Iraqi unit.
That’s just a basic starting point, but other things could affect it… maybe by a factor of 2, 3, maybe even 4 times… but nowhere near 1000 times.
