Under the Bretton Woods system, because the currencies of various countries are linked to the US dollar at a fixed exchange rate, and the US dollar can be freely converted into gold, the exchange rates of various countries are actually determined by the proportion of the gold content they represent.

Under the floating exchange rate system, due to the non-monetization of gold, the exchange rates of currencies in various countries are determined by the supply and demand of foreign exchange, which is completely free to float, no longer determined by their gold content, but by the value represented by the two currencies, that is, the comparison of their domestic purchasing power. The domestic purchasing power of money is restricted by the circulation law of paper money. If the number of paper money in circulation exceeds the actual amount of money needed, the actual value of paper money will decrease, prices will rise, and the purchasing power of money will decline, which means that the exchange rate of the country's currency will decline.

If a country's domestic price rises, its currency purchasing power declines, and the exchange rate remains unchanged, it is characterized by overestimating the external value of its currency. The external value of domestic currency should not be overestimated for a long time, but should be adjusted in time to make it basically consistent with domestic purchasing power. Therefore, under the condition of paper money circulation, the ratio of domestic purchasing power of the two currencies is the basis for determining the exchange rate.