Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. If you continue browsing the site, you agree to the use of cookies on this website. See our User Agreement and Privacy Policy.

Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. If you continue browsing the site, you agree to the use of cookies on this website. See our Privacy Policy and User Agreement for details.

Like this presentation? Why not share!

- Purchasing power parity (ppp) by Amit Pagada 6394 views
- Purchasing power parity by Santhosh Kumar 11129 views
- Purchasing power parity by Tata Mutual Fund 23942 views
- Purchasing Power Parity by Anshu Singh 7475 views
- Purchasing Power Parity by guestc82250 7292 views
- IRP, PPP, IFE by Rohit Kumar 6014 views

No Downloads

Total views

2,617

On SlideShare

0

From Embeds

0

Number of Embeds

4

Shares

0

Downloads

0

Comments

0

Likes

1

No embeds

No notes for slide

- 1. Purchasing Power Parity<br />
- 2. What are PPPs?<br />The Purchasing power parity (PPP) is a theory of exchange rate determination and a way to compare the average costs of goods and services between countries<br /> For example:<br /> Price of Pen = 2 $ (U.S)<br /> Price of Pen = 90 Rs<br /> then, By PPP, 1$= 45 Rs<br />
- 3. What are the major uses of PPPs?<br />First step in inter-country comparisons in real terms of GDP <br />To compare economic data between countries that is expressed in units of national currency<br />This Can also be achieved using<br /><ul><li> Exchange rate system through forces of demand and supply</li></li></ul><li>X-rate by Demand and Supply <br />Merits<br />X-rates are easily understood being<br /> determined by the demand for &<br /> the supply of currencies <br />X-rates are easily observed, cover all<br /> countries, readily available<br />(newspapers) & timely (daily rates)<br />Demerits<br />X-rate converted GDPs are not<br /> consistent over time<br />Exchange rates are affected by the relative prices of tradable goods and by factors such as interest rates, financial flows etc<br />
- 4.
- 5.
- 6. PPP & X-rate<br />Difference between PPP and X-rate indicates Prices of product is understated or overstated<br />Difference between PPP and X-rate do not Indicates particular currency is undervalued or overvalued<br />
- 7. PPP and X-rate<br />PPP useful when comparing output levels or productivity levels between countries<br />X-rate based comparisons are more appropriate in others<br /> For ex- if an analyst wanted to work out how much could be imported with the proceeds from a particular level of exports then it would be necessary to use exchange rates rather than PPPs.<br />Ideally in long run X-rate converges to PPP rate<br />
- 8. PPP Equilibrium Story<br />
- 9. PPP and X-rate in Long Run<br />Market <br />Basket<br />Ratio<br />Year<br />
- 10.
- 11. GDP-purchasing power parity 2009 Country Ranks <br />
- 12. How are PPPs calculated for GDP?<br />Two stages<br />At the product group level<br /> CB = P1Q1 + P2Q2 + P3Q3 + ... + PnQn<br /> PPP for Product group N between two country<br /> = (CB)country1/(CB)Country2 <br />At the GDP or any aggregate levels<br /> X=[(PPP PG1)*W1 + ------- +(PPP PG N)*Wn] <br /> PPP GDP of two country = X country1/ X country2 <br />Prices used in the calculation of PPPs are market Prices<br />
- 13. Gerschenkron effect arises when aggregation methods that use either a reference price structure or a reference volume structure to compare countries.<br />Country reports prices that are not representative of its consumption patterns<br />Situations when biases arise in PPPs<br />
- 14. Interest rate Pairity<br />The relationship between the exchange rates and interest rates, is called Interest rate parity or covered interest arbitrage<br />Interest rate parity (IRP) holds when the rate of return on one currency deposits is just equal to the expected rate of return on other currency deposits.<br />
- 15. Covered interest rate Parity<br />Risk of foreign exchange is covered by entering into forward contract<br />

No public clipboards found for this slide

×
### Save the most important slides with Clipping

Clipping is a handy way to collect and organize the most important slides from a presentation. You can keep your great finds in clipboards organized around topics.

Be the first to comment