<p>There is an idea called the <em>law of one price</em>.</p>
<p>Assume they're making a durable, easily transported grain. Rice, maybe. Assume this is the only thing made in the entire world, because life is complicated and this abstract example is supposed to be simple. Call the local currency J's (because it's easy to reach on my keyboard).</p>
<p>Finally, assume rice is \$2/lb in the real world, 10J/lb locally.</p>
<p>Presumably, some rice-buying speculators should be willing to offer about \$2 to get 10J, roughly.</p>
<p>But, to make things more complicated, there are other practical questions:</p>
<ul>
<li>How reliable is the supply chain to get rice from this country? What is the risk?</li>
<li>How about transportation costs? Rice rots, eventually, must be shipped dry, etc.</li>
<li>Are there other uses for J? When other goods are introduced, how do we deal with the fact that this direct average no longer is clear?</li>
</ul>
<p>The comments are correct that in practice small countries tend to absorb the currency of larger countries, usually USD but even BTC has been used.  The logistics of managing a stable currency are too difficult and require institutional strength and a great deal of reputation. Few investors are interested in buying into something that that might go up in smoke.</p>

CC BY-SA 4.0
2022-10-19T21:28:19.920Z
2022-10-19T21:28:19.920Z
RegressForward
<p>I have always read in present time currency exchange rate works on demand and supply</p>
<p>But imagine tomorrow a brand new nation with brand new currency is born</p>
<p>All its people are farmers and land is not that much fertile , so all they grow is to feed themselves, to world economy they can provide cheap labour but population is 1 million</p>
<p>Now they want to trade with other country, so how will they determine the currency exchange rate ?</p>
<p>Demand and supply will work afterwards but first we need to decide at which rate to peg this new currency to other worlds currency</p>

CC BY-SA 4.0
2022-10-07T09:03:04.887Z
Nobody will accept their currency, they will have to use currency of another country for international trade.
Naktibalda
CC BY-SA 4.0
2022-10-07T09:21:31.243Z
Does this answer your question? [Who determines the exchange rate and how?](https://economics.stackexchange.com/questions/19484/who-determines-the-exchange-rate-and-how)
Giskard
CC BY-SA 4.0
2022-10-07T10:44:46.627Z
@Naktibalda they want others to use there currency, imagine thus hypothetical country is looking to enter the global trade like anyother normal country
anuraag shukla
CC BY-SA 4.0
2022-10-07T10:46:56.810Z
@Giskard your link again provides that simple demand and supply answer but i am looking at the starting point, two countries meeting for first time and deciding to trade, what happens to them?
anuraag shukla
CC BY-SA 4.0
2022-10-07T11:57:12.483Z
@anuraagshukla yea just because country or someone wants something to happen it does not mean it’s realistic or possible. I would want to be able to grow wings and just fly to work instead of biking, yet alas that’s not possible. It’s not possible to develop highly developed exchange rates markets overnight, and it’s impossible for a subsistence farming society to have highly developed trade networks and exchange rate markets.
1muflon1
CC BY-SA 4.0
2022-10-07T16:49:25.793Z
@1muflon1 so what will that society do, other than farming lets say they can provide cheap labour but population is also on low side lets say only 1 million, now they want to enter join the world but currency should of the country only
anuraag shukla
CC BY-SA 4.0
2022-10-07T17:20:22.800Z
they would use USD for international trade, like everybody else.
Naktibalda
CC BY-SA 4.0
2022-10-07T18:36:49.347Z
If the price of food (in the new currency) has been established *within* the new country then people from other countries can see what value the currency has. So, assuming that foreigners have some desire to buy food from the new country then this will establish an exchange rate... though if the price of food has yet to be established within the new country then that's another question.
Mick
CC BY-SA 4.0
2022-10-08T07:49:35.283Z
@naktibalda they want to use their own currency that is compulsory
anuraag shukla
CC BY-SA 4.0
2022-10-08T07:50:55.627Z
@mick so we can compare lets say 1kg price of tomato between two countries and get the exchange rate, yes this sounds good answer, this seems to be perfect answer
anuraag shukla
<currency><currency-exchange>
How to determine exchange rate for a new currency
anuraag shukla
# How to determine exchange rate for a new currency

(Asked by: username_0 on 2022-10-07)

I have always read in present time currency exchange rate works on demand and supply

But imagine tomorrow a brand new nation with brand new currency is born

All its people are farmers and land is not that much fertile , so all they grow is to feed themselves, to world economy they can provide cheap labour but population is 1 million

Now they want to trade with other country, so how will they determine the currency exchange rate ?

Demand and supply will work afterwards but first we need to decide at which rate to peg this new currency to other worlds currency

**Tags:** currency, currency-exchange

> **Comments:**
> **username_1**: Nobody will accept their currency, they will have to use currency of another country for international trade.  
> **username_2**: Does this answer your question? [Who determines the exchange rate and how?](https://economics.stackexchange.com/questions/19484/who-determines-the-exchange-rate-and-how)  
> **username_0**: @username_1 they want others to use there currency, imagine thus hypothetical country is looking to enter the global trade like anyother normal country  
> **username_0**: @username_2 your link again provides that simple demand and supply answer but i am looking at the starting point, two countries meeting for first time and deciding to trade, what happens to them?  
> **username_3**: @username_0 yea just because country or someone wants something to happen it does not mean it’s realistic or possible. I would want to be able to grow wings and just fly to work instead of biking, yet alas that’s not possible. It’s not possible to develop highly developed exchange rates markets overnight, and it’s impossible for a subsistence farming society to have highly developed trade networks and exchange rate markets.  
> **username_0**: @username_3 so what will that society do, other than farming lets say they can provide cheap labour but population is also on low side lets say only 1 million, now they want to enter join the world but currency should of the country only  
> **username_1**: they would use USD for international trade, like everybody else.  
> **username_4**: If the price of food (in the new currency) has been established *within* the new country then people from other countries can see what value the currency has. So, assuming that foreigners have some desire to buy food from the new country then this will establish an exchange rate... though if the price of food has yet to be established within the new country then that's another question.  
> **username_0**: @username_1 they want to use their own currency that is compulsory  
> **username_0**: @username_4 so we can compare lets say 1kg price of tomato between two countries and get the exchange rate, yes this sounds good answer, this seems to be perfect answer  

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## 1 answers

### Answer by username_5 on 2022-10-19. Score: 1

There is an idea called the *law of one price*.

Assume they're making a durable, easily transported grain. Rice, maybe. Assume this is the only thing made in the entire world, because life is complicated and this abstract example is supposed to be simple. Call the local currency J's (because it's easy to reach on my keyboard).

Finally, assume rice is \$2/lb in the real world, 10J/lb locally.

Presumably, some rice-buying speculators should be willing to offer about \$2 to get 10J, roughly.

But, to make things more complicated, there are other practical questions:

* How reliable is the supply chain to get rice from this country? What is the risk?
* How about transportation costs? Rice rots, eventually, must be shipped dry, etc.
* Are there other uses for J? When other goods are introduced, how do we deal with the fact that this direct average no longer is clear?

The comments are correct that in practice small countries tend to absorb the currency of larger countries, usually USD but even BTC has been used. The logistics of managing a stable currency are too difficult and require institutional strength and a great deal of reputation. Few investors are interested in buying into something that that might go up in smoke.


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