Islamic art represents a unique facet of global artistic traditions. It is differentiated by distinct and marked Classical Greek, Roman, and Egyptian art in terms of principles and aesthetics. Contrary to the classical focus on figural representations and idealized human forms, especially in religious contexts, characteristic aniconism of Islamic art avoids the representation of living beings. Instead, it uses various geometric patterns, arabesques, and calligraphy. This insistence on the abstract art form encourages spiritual contemplation, which is divorced from the material world and caters to Islamic principles, whereby an individual is warned from falling into idolatry.
Islamic art and modern abstract art agree in the appreciation of form, line, and color as having an intrinsic beauty of their own, apart from what representational exactitude can give (Stierlin, 2002). Abstract artists attempt to transmit feelings or even metaphysical ideas using patterns and compositions that do not represent the things found in everyday visual reality. These foci of abstraction in both realms build a language with a universal nature for art—one that goes beyond cultural and temporal barriers to illustrate a profound dialogue between ancient Islamic art and contemporary movements.
Navigating the Currency Maze: A Look at Exchange Rates
However, in the complex world of international trade, it all comes down to exchange rates. Always determined by the numbers, the exchange rates fluctuate and tell a person how much of one currency must be purchased by another. That is significant for businesses and people to understand (LeRoy & Werner, 2014). This discussion investigates exchange rates in two scenarios and discusses the roles of interest rates, inflation, and Purchasing Power Parity Play.
Scenario 1: South Korea vs. United States – The Interest Rate Parity Dance
Now, supposing South Korea can offer a return of 4% against the US’s offering of 7% on a one-year government bond. However, looking further, it turns out that Korea is expected to have inflation at only 2%, while the US is going up to 5%. Here, the concept of Interest Rate Parity (IRP) steps in. According to IRP, the expected returns must be equal if invested in one currency holding vis-à-vis another after covering interest rates and exchange rate changes.
We then seek to consider the real interest rates—the rates of interest that include aspects of inflation—to know the real motivation one could have in keeping a given currency, calculated by subtracting expected inflation from nominal interest rates as follows:
- Real Interest Rate (South Korea) = 4% – 2% = 2%
- Real Interest Rate (US) = 7% – 5% = 2%
Interestingly, both countries give the same real interest rate (2%). In other words, a holder of one country’s currency does not enjoy any inherent advantages brought only by differences in interest rates over the other. Per the IRP view, there is very little pressure for large movements over one year. So, the exchange rate for other currencies against the US Dollar and South Korean Won (USD/KRW) will remain at the same $1 = ₩1,200.
Scenario 2: Britain vs. United States – Purchasing Power Parity in Action
This introduces the PPP scenario that asserts exchange rates should adjust to equal prices for a given basket of identical goods between two countries. Take beef—$2.80 per pound in the US and £3.70 in Britain. To find the PPP exchange rate, we divide the British price by the US price:
- PPP Exchange Rate = £3.70 / $2.80 ≈ £1.32 per $1
According to the PPP, one US dollar should be converted to around £1.32 to exchange the purchasing power with beef in another country equally. Let us now assume that the beef price will rise in both countries. The level of the exchange rate is not one of our predictions. Still, relative changes in the price level, one should expect, would cause some movement in the exchange rate that would reflect them and maintain some PPP.
The Intricate Relationship Between Interest Rates and Exchange Rates
With just this information, developing a particular level of interest rate that is expected in Britain will take much work. Where IRP predicts that the interest rate should adjust until the returns on investments adjusted for the exchange rate changes are equal, other factors, such as market expectations and risks, are factored in.
However, we can analyze a hypothetical scenario:
- US Interest Rate = 10%
- PPP Exchange Rate = £1.32 per $1 (assuming it holds)
If beef price changes are as expected and the exchange rate adjusts accordingly to hold PPP, then holding British pounds should give a higher return after adjusting for currency appreciation. That leaves us to expect that the British interest rate would, of course, be several percentage points above the likely 6-8% level of inflation and, therefore, at the same time, several percentage points below 10% to compensate for the expected currency appreciation. Besides, it would be like pure speculation without the data on the risk premium and market expectations.
Beyond the Models: The Real World of Exchange Rates
These are examples of how interest rates, inflation, and PPP determine the exchange rates; however, such is not the case in the real world (Krugman et al., 2018). The world is full of examples where political instability and sharp changes in investor sentiment, coupled with speculation, assist in determining exchange rates. These models provide an excellent underlying basis for understanding the forces, but they could be better predictors of the future. Understanding these concepts will help one make an informed decision in the currency maze that changes every so often in the global marketplace.
References
Stierlin, H. (2002). Islamic art and architecture: From Isfahan to the Taj Mahal. Thames & Hudson.
LeRoy, S. F., & Werner, J. (2014). Principles of financial economics (2nd ed.). Cambridge University Press.
Krugman, P., Obstfeld, M., & Melitz, M. (2018). International economics (11th ed.). Pearson.
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