Chi tiêu nhiều tiền hơn để mua hàng hoá tương tự là một định nghĩa cổ điển của lạm phát, và lạm phát chắc chắn có thể góp phần khấu hao của đồng tiền (làm suy yếu tương đối so với đồng tiền khác). Ngược lại, giảm phát là khi cùng một số lượng tiền mua thêm một tốt hơn đã làm trước đó, | 8 PRODUCTS CASH FLOWS AND CREDIT ago 1 probably could have been exchanged for 100 pencils. Today however 100 pencils cost more than 1. Accordingly we could say that the value of the dollar has depreciated it buys fewer pencils today than it did 40 years ago. To express this another way today we have to spend more than 1 to obtain the same 100 pencils that people previously spent just 1 to obtain. Spending more money to purchase the same goods is a classic definition of inflation and inflation certainly can contribute to a currency s depreciation weakening relative to another currency . Conversely deflation is when the same amount of money buys more of a good than it did previously and this can contribute to the appreciation strengthening relative to another currency of a currency. Deflation may occur when there is a technological advancement with how a good or service is created or provided or when there is a surge in the productivity a measure of efficiency involved with the creation of a good or providing of a service. Another way to value a currency is by how many units of some other currency it can obtain. An exchange rate is defined simply as being the measure of one currency s value relative to another s. Yet while this simple definition of an exchange rate may be true it is not very satisfying. Exchange rates generally tend to vary over time what influences how one currency will trade in relation to another Well no one really knows precisely but a couple of theories have their particular devotees and they are worth mentioning here. Two of the better-known theories applied to exchange rate pricing include the theory of interest rate parity and purchasing power parity theory. INTEREST RATE PARITY Assume that the annual rate of interest in country X is 5 percent and that the annual rate of interest in country Y is 10 percent. Clearly all else being equal investors in country X would rather have money in country Y since they are able to earn more basis points or
