The Power Purchasing Parity (PPP) refers to the theory that the nominal exchange rate between two currencies must be equivalent to the ratio of aggregate price level between the two countries. Therefore, a unit of currency of a country should have equal purchasing power in the other foreign country (Taylor and Taylor, 2004). The concept derives from the law of one price, which explained presence the competitive market structure and absence of official trade barriers and identical product should sell at the same price in two different markets when the price are expressed in a common currency (Suranovic, 2012). The Law of one price is related to the idea of PPP may hold because of the perfect good arbitrage while the arbitrage existence where people make a riskless profit from exploited price differences. Besides that, PPP also knew as absolute PPP which means the exchange rate between two currencies should be determined by the price levels and comparable identical bundle of goods in the two countries. The relative PPP refers to the exchange rate will change by the amount of inflation rates in the countries concerned over the same period.
According to Sarno and Chowdhury (2003) provide empirical evidence that PPP works much better only of tradable goods because the non-traded goods prices in the aggregate price index will cause a problem for the testing of PPP. They explained that the price of trading good tends to international competition which can prevent the price of goods is exceeding among countries. On the other hand, some researcher examined the measurement problem in testing for PPP such as unable to comparable since countries have different weights to different classes of goods in their construction of the baskets o...
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... Real Interest Rate: A Multi-Country Empirical Study,Canadian Journal of Economics, 17:283-311. Exchange Rate Theories. 2014. K.Brain, p. 3. Available at: http://homepages.uel.ac.uk/K.Bain/PPP.pdf [Accessed: 27 March 2014]
11. Sarno, L. and Chowdhury, I., 2003. The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index. Economic Notes, 32, 295-333.
12. Sarno, L., Taylor, M., 2002. The Purchasing Power Parity and the Real Exchange Rate. International Monetary Fund Staff Papers Taylor, M. P., 2003. Purchasing power parity. Review of International Economics 11, 436-452.
13. Suranovic, S. 2012. Finance: Chapter 30-1: Introduction to Purchasing Power Parity (PPP). [online] Available at: http://internationalecon.com/Finance/Fch30/F30-1.php [Accessed: 20 Mar 2014].
14. Taylor, A. M. and Taylor, M. P. 2004. The purchasing power parity debate
Saputo has production plants in Canada, America, Argentina and Australia, and many of their products are sold on the international market. Due to the fact that products are sold internationally, exchange rates affect the end price of products in different countries. For example, many of the raw materials used in the Argentine plants, such as milk, is imported from Canada. Therefore, the exchange rate between Canada and Argentina affects the cost of raw materials for the Argentina plant. If the Canadian dollar appreciates against the Argentine peso, the cost of raw materials will increase for the production plant, and vice versa.
The purchasing power parity implies the following relationship between the home (GB £) and local (US $) costs of debt:
The rate of a Big Mac compare at a local McDonald’s is that the Big Mac index was created by The Economist in 2009 as a light-hearted direct to whether money are at their “accurate” level. It is related on the hypothesis of “purchasing-power parity”, the idea that in the long run swaps rates must move in the way of the speed that would match the prices of an equal basket of commodities and services in any two countries. The average rate of a Big Mac in united state in July 2009 was 4.79 dollar.
Thus, imports of American goods are under less competitive pressure to keep prices low. Thus, weak dollar benefits U.S. exports by making American goods cheaper in foreign countries. Foreign tourists can afford to travel and visit the United States. When the dollar is falling, foreign purchasing power is increasing. Purchasing power is the amount of value of a good or service compared to the amount that you paid.
Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.
Historically, this is outlined in the domestic societal framework (a rationalist point of view dictating political outcomes as a direct result of domestic material interests in society). Whatever society wants, society gets, leaving the consumer is to benefit from a fixed exchange rate. Competition exists between all interests. Whatever interest dominates takes the winning interest. The winning interest, then, determines the outcome. With businesses facing pressure to decrease domestic prices, consumers now have the upper hand. (Wellhausen, 10-2-14). Thus, due to the enhancing credibility of the government, consumers also are to benefit from a fixed exchange rate. (Multiple governments
PPP problems go into exchange rate policy when a country is seeking to gain advantages by a cautious policy of maybe veering the exchange rate away from PPP. A real depreciation serves to gain competitiveness and shift employment toward the depreciating country.in Europe the unemployment rates our lower because their dollar value on the exchange rate exceeds ours creatign more business which in turn equals mor jobs. During the 1930s people would call this "beggar—thy-neighbor" policy and in World War II it became "export— led growth." A policy of appreciation by difference is to serve and reduces the inflationary pressure as the rate of increased traded goods prices is being shoved way below the rate of inflation. These economic effects of purchasing power disparities, are really not so difficult to bring about such as : easy money in the short term, serves to veer the exchange rate and that creates employment. In contrast though, a economy that may strongly indexed with exchange rate influence’s on an attempt at creating employment equaling easy money would probably be really frustrating as the exchange depreciation trigger off-setting the wage and price of inflation. Deviations from PPP have also been used as a disinflation.
...M. "INTERNATIONAL CAPITAL MOBILITY IN HISTORY: PURCHASING-POWER PARITY ~ THE LONG RUN." National Bureau of Economic Research. Sept. 1996. Web. 15 Apr. 2014. .
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
There have been deliberations about the ideal exchange rate system for a period of time, dazzling the advancement of the world economy and the manner of monetary policy.
In order for international trade to work well, governments must allow the world market to determine how goods are sold, manufactured and traded for all to economically prosper. While all nations may have the capability to produce any goods or services needed by their population, it is not possible for all nations to have a comparative advantage for producing a good due to natural resources of the country or other available resources needed to produce a good or service. The example of trading among states comprising the United States is an example of how free trade works best without the interve...
Engel, Charles 2000, “Long-Run PPP May Not Hold After All”, Journal of International Economics, Vol. 51, no. 2, pp. 243-73.
Radelet, Steven, and Jeffrey D. Sachs. “Currency Crises.” The National Bureau of Economic Research. National Bureau of Economic Research, Jan. 2000. Web. 10 Dec. 2013. .
Because this rate, along with the nominal, are constantly in use in the global economy, these rates can fluctuate depending on a range of factors ...
The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. When predicting the production possibility frontiers for Brazil and United States the following factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies. The production possibility frontier is also known as the production possibility curve or the transformation curve would be as follows. The two countries form a synergetic alliance where Brazil exclusively produces clothes while United States exclusively produces soda, with open