Purchasing Power Parity
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The document discusses the purchasing power parity (PPP) theory of exchange rates. PPP states that inflation rates should be reflected in changes in exchange rates to keep prices of identical goods equal across countries. It assumes the "law of one price," where identical goods have the same price globally excluding transaction costs. The theory was introduced in the 1920s as hyperinflation caused currency depreciation. Absolute PPP posits the exchange rate equals the ratio of price levels between countries. Deviations from absolute PPP can occur in real world markets.
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Exchange rate theories
This document discusses several exchange rate theories, including the traditional or elasticities approach, purchasing power parity (PPP), and interest rate parity (IRP).
The traditional approach assumes an equilibrium exchange rate where a country's imports balance its exports. If imports exceed exports, the exchange rate will fall to make the country's exports cheaper and imports more expensive, balancing trade.
PPP has both an absolute and relative form. In absolute PPP, similar goods should have the same price in different currencies. Relative PPP recognizes market imperfections but holds that inflation rates between countries will offset exchange rate changes over time.
IRP links exchange and money markets, stating that interest rate differences between countries should equal forward exchange
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This document discusses the balance of payments theory of exchange rates. It argues that the exchange rate is determined by the demand and supply of a country's currency, which is influenced by the balance of payments. A deficit leads to a falling exchange rate as demand exceeds supply, while a surplus increases demand for the home currency and causes an appreciation. The theory uses demand and supply curves to show how the equilibrium exchange rate is reached when quantities demanded and supplied are equal. It has merits in providing an equilibrium analysis, but also criticisms around its assumptions and indeterminacy.
Purchasing power parity
The document discusses the concept of purchasing power parity (PPP). It defines PPP as the exchange rate between two currencies that would equalize the purchasing power of the currencies in their respective countries. The document notes that under PPP, a given amount of one currency should have the same purchasing power whether used directly to purchase goods in that country or converted to the other currency at the PPP rate. It then asks several questions about how inflation, interest rates, and other factors may impact exchange rates. The rest of the document provides explanations of absolute and relative PPP, how PPP is used to make cross-country comparisons, and some limitations of the PPP theory.
Exchange Rate Theory
There are three main theories of exchange rate determination discussed in the document:
1) Purchasing power parity (PPP) theory states that exchange rates should adjust to equalize the prices of identical goods between countries when translated to a common currency.
2) Interest rate parity theory states that interest rate differentials between countries should equal expected changes in the exchange rate.
3) Balance of payments theory explains exchange rate movements through a country's balance of trade and capital flows.
Purchasing Power Parity - Introduction, Meaning, Merits and Demerits
Purchasing power parity (PPP) theory states that exchange rates between currencies should equalize purchasing power across countries. The basis for PPP is the law of one price, which states that a good cannot have two different prices in separate markets. PPP theory predicts that the price level and cost of living should be the same across countries when exchange rates adjust to eliminate price differences. PPP exchange rates equalize the prices of identical baskets of goods and services between countries.
Determination of foreign exchange rate
This document discusses different types of exchange rate systems and how exchange rates are determined. It outlines fixed exchange rates where a government sets the rate, floating/flexible rates where market forces determine the rate, and managed rates where a government intervenes to influence the rate. It then provides details on how demand and supply impact exchange rate equilibrium and can cause currency appreciation or depreciation under flexible systems.
Purchasing Power parity
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The document discusses the Fisher effect, which states that the real interest rate equals the nominal interest rate minus the expected inflation rate. It provides examples of how nominal interest rates on savings accounts incorporate expected inflation. The document also defines nominal interest rates as actual rates provided by lenders and real interest rates as rates adjusted for purchasing power. Finally, it discusses how the Fisher effect shows that changes in the money supply will affect nominal interest rates and inflation in tandem, without impacting real interest rates.
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Exchange rate theories
This document discusses several exchange rate theories, including the traditional or elasticities approach, purchasing power parity (PPP), and interest rate parity (IRP).
The traditional approach assumes an equilibrium exchange rate where a country's imports balance its exports. If imports exceed exports, the exchange rate will fall to make the country's exports cheaper and imports more expensive, balancing trade.
PPP has both an absolute and relative form. In absolute PPP, similar goods should have the same price in different currencies. Relative PPP recognizes market imperfections but holds that inflation rates between countries will offset exchange rate changes over time.
IRP links exchange and money markets, stating that interest rate differences between countries should equal forward exchange
Balance of payment theory
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Purchasing power parity
The document discusses the concept of purchasing power parity (PPP). It defines PPP as the exchange rate between two currencies that would equalize the purchasing power of the currencies in their respective countries. The document notes that under PPP, a given amount of one currency should have the same purchasing power whether used directly to purchase goods in that country or converted to the other currency at the PPP rate. It then asks several questions about how inflation, interest rates, and other factors may impact exchange rates. The rest of the document provides explanations of absolute and relative PPP, how PPP is used to make cross-country comparisons, and some limitations of the PPP theory.
Exchange Rate Theory
There are three main theories of exchange rate determination discussed in the document:
1) Purchasing power parity (PPP) theory states that exchange rates should adjust to equalize the prices of identical goods between countries when translated to a common currency.
2) Interest rate parity theory states that interest rate differentials between countries should equal expected changes in the exchange rate.
3) Balance of payments theory explains exchange rate movements through a country's balance of trade and capital flows.
Purchasing Power Parity - Introduction, Meaning, Merits and Demerits
Purchasing power parity (PPP) theory states that exchange rates between currencies should equalize purchasing power across countries. The basis for PPP is the law of one price, which states that a good cannot have two different prices in separate markets. PPP theory predicts that the price level and cost of living should be the same across countries when exchange rates adjust to eliminate price differences. PPP exchange rates equalize the prices of identical baskets of goods and services between countries.
Determination of foreign exchange rate
This document discusses different types of exchange rate systems and how exchange rates are determined. It outlines fixed exchange rates where a government sets the rate, floating/flexible rates where market forces determine the rate, and managed rates where a government intervenes to influence the rate. It then provides details on how demand and supply impact exchange rate equilibrium and can cause currency appreciation or depreciation under flexible systems.
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The document discusses the Fisher effect, which states that the real interest rate equals the nominal interest rate minus the expected inflation rate. It provides examples of how nominal interest rates on savings accounts incorporate expected inflation. The document also defines nominal interest rates as actual rates provided by lenders and real interest rates as rates adjusted for purchasing power. Finally, it discusses how the Fisher effect shows that changes in the money supply will affect nominal interest rates and inflation in tandem, without impacting real interest rates.
Spot and Forward Exchange Rate
The document discusses spot exchange rates, which are the prices for exchanging one currency for another for immediate delivery, usually within two business days. Spot exchange rates represent the price paid in one currency to purchase another currency. They are the prevailing rates in the foreign exchange market for currencies that are delivered immediately as opposed to a future date. Spot exchange rates make up 43% of total foreign exchange transactions and are prone to fluctuations from day to day. A spot contract is an agreement to exchange currencies at the spot rate for delivery within the standard settlement period, which is two business days after the trade date.
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The document discusses the Purchasing Power Parity (PPP) theory, which states that exchange rates between currencies are determined by their relative purchasing power. It explains that under PPP, exchange rates adjust to changes in inflation so that the same goods cost the same in each country when prices are converted to a common currency. The document outlines the absolute and relative versions of PPP theory and notes some limitations, such as differences in goods baskets between countries. An example is provided to demonstrate how exchange rates adjust proportionally according to changes in domestic and foreign inflation rates under relative PPP.
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The mint parity theory explains how exchange rates between countries on the gold standard were determined. Under this system, currencies were defined by and convertible to a fixed quantity of gold. The exchange rate between two currencies adhering to the gold standard was based on the parity of the mint price of gold in the two countries. This ensured stability in exchange rates as long as countries maintained their commitment to gold convertibility at a fixed price. However, the gold standard broke down in the early 20th century, rendering the mint parity theory obsolete.
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The document discusses exchange rate mechanisms and types of exchange rates. It provides details about:
1) The Exchange Rate Mechanism (ERM) which is used by central banks to manage currency exchange rates relative to other currencies through fixed or floating exchange rates.
2) The notable European ERM introduced in 1979 to reduce exchange rate variability between European countries before adopting a single currency. It faced issues in 1992 when Britain withdrew.
3) Types of exchange rates including fixed rates which maintain stable rates, floating rates set by market forces, and managed floats where governments influence rate changes.
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This document discusses interest rate parity theory. It begins by defining spot and forward rates. Spot rates are prices for immediate settlement, while forward rates refer to rates for future currency delivery adjusted for cost of carry. Interest rate parity theory states that interest rate differentials between currencies will be reflected in forward premiums or discounts. The theory prevents arbitrage opportunities by making returns equal whether investing domestically or abroad when measured in the home currency. The document provides an example of covered and uncovered interest rate parity. Covered parity involves hedging exchange rate risk while uncovered parity does not. Empirical evidence shows uncovered parity often fails while covered parity generally holds for major currencies over short time horizons.
Restatement of quantity theory of money
Milton Friedman proposed a restatement of the Quantity Theory of Money (QTM) that incorporated permanent real income and wealth. He argued that the demand for money depends on total wealth, expected returns on various assets, and tastes/preferences. Friedman defined permanent real income as the sustainable level of income without reducing wealth over time. His equation for the QTM included factors like the money stock, the price level, permanent income, expected rates of return on different assets, and other variables. While improving on prior theories, Friedman's restatement still had limitations like subjective terms that are hard to measure and challenges maintaining a steady money supply in a modern economy.
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Interest rate parity 1
The Interest Rate Parity states that the difference between interest rates of two countries equals the difference between the forward and spot exchange rates. It plays an essential role in foreign exchange markets by preventing arbitrage opportunities. When returns on two currencies are equal, interest rate parity prevails. Factors like expected inflation, monetary policy, and economic conditions influence market interest rates. Interest rate parity implies that if the domestic interest rate is lower than the foreign rate, domestic investors will invest abroad to benefit, and vice versa if the domestic rate is higher.
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This document discusses why MNCs forecast exchange rates and different techniques for doing so. MNCs need to forecast exchange rates for hedging decisions, short-term financing, investments, capital budgeting, earnings assessments, and long-term financing. Exchange rate forecasts help MNCs determine things like whether to hedge currency risk, which currency to borrow in, and whether to remit foreign subsidiary earnings. There are four main categories of forecasting techniques: technical analysis of historical exchange rate data, fundamental analysis of economic factors affecting exchange rates, market-based analysis using current spot or forward rates, and subjective assessments.
Purchasing power parity
The document discusses the theory of purchasing power parity (PPP). It defines PPP as the principle that identical baskets of goods should have the same price when expressed in a common currency if not for trade barriers. Absolute PPP suggests prices levels should be equal across countries, while relative PPP suggests inflation differentials should equal exchange rate depreciation. The document provides examples of how PPP can be used to estimate exchange rate levels and changes. It also discusses factors like transaction costs and non-traded goods that can cause deviations from PPP in practice.
Purchasing power parity
Purchasing power parity (PPP) is a concept in international economics that determines exchange rate fluctuations over time based on differences in purchasing power and cost of living between countries. PPP holds that identical goods should have the same real price after currency conversion. It aims to measure purchasing power of currencies by comparing the prices of common goods and services in different countries rather than using exchange rates alone. PPP is one of the most significant theories in international finance for understanding how exchange rates adjust to equalize the purchasing power of different currencies.
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The document discusses the Purchasing Power Parity (PPP) theory, which states that exchange rates between currencies are determined by their relative purchasing power. It explains that under PPP, exchange rates adjust to changes in inflation so that the same goods cost the same in each country when prices are converted to a common currency. The document outlines the absolute and relative versions of PPP theory and notes some limitations, such as differences in goods baskets between countries. An example is provided to demonstrate how exchange rates adjust proportionally according to changes in domestic and foreign inflation rates under relative PPP.
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Gold standard is a monetary system in which the standard unit of currency is a fixed quantity of gold or is kept at the value of a fixed quantity of gold.
Exchange rate determination.
This paper develops an equilibrium model of the determination of exchange rates and prices of goods. Changes in relative prices due to supply or demand shifts induce changes in exchange rates and deviations from purchasing power parity. These changes may create a correlation between the exchange rate and the terms of trade, but this correlation cannot be exploited by governments to affect the terms of trade through foreign exchange market operations. The model emphasizes the role of relative price changes due to real disturbances and how these changes affect both exchange rates and the terms of trade through shifts in supply and demand. Government interventions in foreign exchange markets cannot influence exchange rates if the relationship between exchange rates and terms of trade is due to shifts in real supply and demand for domestic and foreign goods.
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The mint parity theory explains how exchange rates between countries on the gold standard were determined. Under this system, currencies were defined by and convertible to a fixed quantity of gold. The exchange rate between two currencies adhering to the gold standard was based on the parity of the mint price of gold in the two countries. This ensured stability in exchange rates as long as countries maintained their commitment to gold convertibility at a fixed price. However, the gold standard broke down in the early 20th century, rendering the mint parity theory obsolete.
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The document discusses exchange rate mechanisms and types of exchange rates. It provides details about:
1) The Exchange Rate Mechanism (ERM) which is used by central banks to manage currency exchange rates relative to other currencies through fixed or floating exchange rates.
2) The notable European ERM introduced in 1979 to reduce exchange rate variability between European countries before adopting a single currency. It faced issues in 1992 when Britain withdrew.
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This document provides an overview of international finance. It defines international finance as the study of monetary interactions between countries, focusing on areas like foreign direct investment and currency exchange rates. The key features discussed are that international finance affects economic and monetary systems across borders, and involves major players like multinational corporations. It also involves methods of financing international business and foreign trade. Challenges in international finance mentioned include varied economic systems between countries, tariffs, political risks, and cultural/language differences. The document also discusses dumping, where a company sells goods at a high price domestically but a low price internationally, and anti-dumping measures countries employ in response.
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This document discusses types of foreign exchange exposure that companies face: translation exposure, transaction exposure, and economic exposure. Translation exposure occurs when foreign currency fluctuations impact the valuation of foreign subsidiaries' assets and liabilities. Transaction exposure arises from changes in exchange rates between when a contract is made and settled. Economic exposure is the impact of currency changes on future cash flows, investments, and earnings. Companies can use various hedging techniques like forwards, futures, and options to manage transaction and economic exposure. Reducing costs through offshoring production is one method to mitigate economic exposure.
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This document discusses interest rate parity theory. It begins by defining spot and forward rates. Spot rates are prices for immediate settlement, while forward rates refer to rates for future currency delivery adjusted for cost of carry. Interest rate parity theory states that interest rate differentials between currencies will be reflected in forward premiums or discounts. The theory prevents arbitrage opportunities by making returns equal whether investing domestically or abroad when measured in the home currency. The document provides an example of covered and uncovered interest rate parity. Covered parity involves hedging exchange rate risk while uncovered parity does not. Empirical evidence shows uncovered parity often fails while covered parity generally holds for major currencies over short time horizons.
Restatement of quantity theory of money
Milton Friedman proposed a restatement of the Quantity Theory of Money (QTM) that incorporated permanent real income and wealth. He argued that the demand for money depends on total wealth, expected returns on various assets, and tastes/preferences. Friedman defined permanent real income as the sustainable level of income without reducing wealth over time. His equation for the QTM included factors like the money stock, the price level, permanent income, expected rates of return on different assets, and other variables. While improving on prior theories, Friedman's restatement still had limitations like subjective terms that are hard to measure and challenges maintaining a steady money supply in a modern economy.
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Interest rate parity 1
The Interest Rate Parity states that the difference between interest rates of two countries equals the difference between the forward and spot exchange rates. It plays an essential role in foreign exchange markets by preventing arbitrage opportunities. When returns on two currencies are equal, interest rate parity prevails. Factors like expected inflation, monetary policy, and economic conditions influence market interest rates. Interest rate parity implies that if the domestic interest rate is lower than the foreign rate, domestic investors will invest abroad to benefit, and vice versa if the domestic rate is higher.
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we are trying to explain the conditions that will result in various forms of international arbitrage and concept of interest rate parity
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There are three main types of exchange rate systems: floating exchange rates, fixed exchange rates, and managed floating exchange rates. Floating exchange rates fluctuate based on supply and demand in financial markets, while fixed rates are pegged to a value but may be devalued. Managed floating rates involve a central bank intervening in free markets to influence the exchange rate and keep it near a fixed price. Appreciation and depreciation refer to unpredictable increases or decreases in a currency's value, while devaluation and revaluation are government-planned decreases or increases under a fixed exchange rate system. Exchange rates are influenced by economic, political, and psychological market factors.
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Adam Smith first proposed the theory of absolute advantage in his 1776 publication "An Inquiry into the Nature and Causes of the Wealth of Nations" as a rebuttal to mercantilism. The theory argues that countries should specialize in and export goods they can produce at a lower relative cost than other nations, and import goods that other nations can produce at a lower cost, resulting in more global production and wealth overall. An example shows that France has an absolute advantage in wine production while Japan has an advantage in clock and radio production based on their differing labor outputs.
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Forecasting Exchange Rates
This document discusses why MNCs forecast exchange rates and different techniques for doing so. MNCs need to forecast exchange rates for hedging decisions, short-term financing, investments, capital budgeting, earnings assessments, and long-term financing. Exchange rate forecasts help MNCs determine things like whether to hedge currency risk, which currency to borrow in, and whether to remit foreign subsidiary earnings. There are four main categories of forecasting techniques: technical analysis of historical exchange rate data, fundamental analysis of economic factors affecting exchange rates, market-based analysis using current spot or forward rates, and subjective assessments.
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Purchasing power parity
The document discusses the theory of purchasing power parity (PPP). It defines PPP as the principle that identical baskets of goods should have the same price when expressed in a common currency if not for trade barriers. Absolute PPP suggests prices levels should be equal across countries, while relative PPP suggests inflation differentials should equal exchange rate depreciation. The document provides examples of how PPP can be used to estimate exchange rate levels and changes. It also discusses factors like transaction costs and non-traded goods that can cause deviations from PPP in practice.
Purchasing power parity
Purchasing power parity (PPP) is a concept in international economics that determines exchange rate fluctuations over time based on differences in purchasing power and cost of living between countries. PPP holds that identical goods should have the same real price after currency conversion. It aims to measure purchasing power of currencies by comparing the prices of common goods and services in different countries rather than using exchange rates alone. PPP is one of the most significant theories in international finance for understanding how exchange rates adjust to equalize the purchasing power of different currencies.
Purchasing Power Parity
The document discusses arguments against using purchasing power parity (PPP) as the best measure to compare prices and economies. It outlines some uses and users of PPP but notes there are issues with using it to compare prices between countries given variations in international prices. The document analyzes examples showing PPP can be sensitive to international prices and questions whether it is the best measure for comparing economies and building economic models.
Purchasing Power Parity1
The purchasing power parity (PPP) theory compares the average costs of goods and services between countries using exchange rates. PPPs are useful for inter-country comparisons of GDP in real terms and economic data expressed in national currencies. PPPs are calculated at the product group level by comparing consumption baskets, then aggregated to GDP levels using weights. PPP exchange rates are meant to converge with actual exchange rates over the long run, though various factors can cause short-term deviations. PPPs are useful for output and productivity comparisons, while market exchange rates are better for trade-related analyses.
Purchasing Power Parity
Purchasing power parity (PPP) theory focuses on the relationship between inflation and exchange rates. It is based on the law of one price, which states that identical goods should have the same price in different markets. Absolute PPP postulates that the equilibrium exchange rate between two currencies equals the ratio of their price levels. Thus, similar products should have equal prices when measured in a common currency according to absolute PPP. In reality, deviations from absolute PPP can occur due to things like transport costs or trade barriers.
Interest Rate Parity and Purchasing Power Parity
The document discusses interest rate parity (IRP) and purchasing power parity (PPP). IRP states that interest rate differences between countries equal the forward exchange rate minus the spot rate. PPP holds that currency exchange rates adjust so goods cost the same across countries when prices are converted to the same currency. Violations of IRP create arbitrage opportunities. Factors like inflation rates, economic conditions, and monetary policies influence IRP and PPP over time. Formulas are provided for calculating IRP and expected future exchange rates under PPP.
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This document discusses foreign exchange rates and their determination. It explains that foreign exchange rates are the rates at which one country's currency can be converted into another's. These rates are determined by currency supply and demand in global foreign exchange markets. The key factors that influence supply and demand - and thus exchange rates - include interest rates, inflation rates, government budgets, and political stability. The document also outlines different exchange rate systems like fixed, floating, and managed rates.
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International economic ch15
The document discusses theories of long-run exchange rates and purchasing power parity (PPP). It introduces the law of one price and PPP, which predicts that exchange rates will equal the ratio of countries' price levels. Empirical tests find weak support for PPP and the law of one price. Real exchange rates, interest rates, and expected inflation differentials also influence long-run exchange rates. International differences in output, prices, and monetary policies can cause deviations from PPP in both the short and long run.
Market Equilibrium Micro Economics ECO101
This document provides an overview of key concepts in microeconomics including markets, supply and demand, equilibrium, consumer and producer surplus, and the effects of changes in supply and demand. It defines markets, demand, the law of demand, supply, the law of supply, and equilibrium. It also discusses consumer surplus, producer surplus, surpluses and shortages, and the effects of price ceilings and floors.
Quantity theory of money
This document provides an overview of the quantity theory of money and the monetary approach to exchange rates.
It defines key concepts like absolute and relative PPP. It then presents a simple model showing how money supply, income, and price levels are related in determining equilibrium exchange rates. Higher money growth leads to currency depreciation, while higher income growth appreciates a currency.
The document uses examples to illustrate how the model can be applied to forecast exchange rate movements in response to changes in policy like money supply increases. It concludes by reviewing some empirical evidence supporting the monetary approach.
Demand $ supply
This document provides a summary of a lecture on supply and demand. It discusses key concepts including:
- The supply and demand model which looks at interactions between buyers and sellers.
- Perfect and imperfect competition in markets.
- The law of demand which states that as price increases, quantity demanded decreases.
- Supply curves which show the relationship between quantity supplied and price, and how supply can shift due to changes in factors of production.
- Market equilibrium where supply and demand are equal and there is no incentive for prices to change.
Bf
Purchasing power parity (PPP) is a method of estimating national income and cost of living between countries. It compares the amount of currency required to buy the same goods and services in different countries. PPP is used as an alternative to GDP to compare living standards, as it accounts for differences in cost of living. There are challenges to accurate PPP measurement, such as variability in goods baskets and difficulty measuring quality differences between countries. PPP is calculated by comparing the price of a common product in different currencies and countries.
Chapter 10- Foreign Exchange Market-2020-2021.ppt
The document discusses foreign exchange markets and exchange rates. It defines key terms like currency exchange rates, which is the ratio of one currency to another. It also discusses different exchange rate regimes like fixed exchange rates where a currency's value is pegged to another currency or basket of currencies, and floating exchange rates where the value is set by market forces. Fixed rates aim to stabilize currencies but require central bank intervention, while floating rates are self-correcting but can be more volatile. The document also covers theories like purchasing power parity and the law of one price.
Price Levels
The document summarizes theories of long-run exchange rates, including purchasing power parity (PPP) and factors that determine real exchange rates. PPP holds that exchange rates equal price levels between countries in the long run. Empirical evidence does not strongly support PPP due to trade barriers, pricing differences, and measurement issues. A general model recognizes that real exchange rates are influenced by relative demand and supply shifts between countries. Nominal exchange rates are determined by real exchange rates and relative price levels, which are influenced by monetary factors like money supplies.
Chapter 4 Price Levels and the Exchange Rate in the Long run.pdf
Chapter 4 Price Levels and the Exchange Rate in the Long run - ENG
Lecturer: Trần Việt Dung - UEB
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Foreign Exchange Markets
The ppt gives a description of how different theories define working of forex market. ?
when & where do these theories fail?
What is the impact of macro-economic factors like inflation, unemployment etc on forex exchange.?
A nicely formatted presentation.
What are the different types of forex market?
Monetary model of exchange rates
1) The document discusses the monetary model of exchange rates and its predictions. The model predicts that exchange rates will follow the relative money supplies and inflation rates of the two currencies.
2) The model assumes that real money demand is constant, but evidence shows that money demand decreases with higher interest rates. This means the original model is too simplistic.
3) When updated to reflect interest rate effects on money demand, the model implies exchange rates, inflation rates, and interest rates will equalize in the long run between countries according to purchasing power parity and uncovered interest rate parity.
Demand and Supply_HSS-01.pptx
The document discusses demand and supply curves, including how they are determined and how they can shift. It also covers market equilibrium and how prices and quantities are set where supply meets demand. Key factors that can cause shifts in supply and demand are discussed, including price changes, income changes, cost of production changes, and government policies like taxes and subsidies. The impacts of these policies on consumer surplus, producer surplus, and deadweight loss are analyzed through examples using supply and demand diagrams.
Quick Quiz Week6
This document covers key concepts in microeconomics including supply and demand, market structures, price controls, and normal versus inferior goods. It provides definitions and examples of demand, supply, price ceilings, price floors, buffer stocks, and different market models. Situations that cause supply to shift left and the effects of a drought on the corn market over time are also examined using supply and demand diagrams.
Price index - Wikipedia.pdf
This document discusses price indices, which are statistical measures designed to compare price levels or inflation rates between different points in time. It provides definitions and formulas for common types of price indices, such as the Laspeyres index and Paasche index. It also discusses considerations for calculating price indices, such as accounting for changes in quality, and tests that price indices should pass, such as being symmetric over time.
Law of one price (PPP) IFM PRIYANSHI.pdf
This document is a term paper assignment submitted by Priyanshi Srivastava for her MBA in Finance at the University of Lucknow. The paper discusses the topics of purchasing power parity and the law of one price. It provides definitions and concepts related to purchasing power, purchasing power parity, types of purchasing power parity, advantages of using PPP, and the law of one price. The document includes an introduction, acknowledgments, several sections discussing the key topics, and a conclusion.
11 foreign exchange
1. Foreign exchange refers to foreign currencies and bank deposits denominated in foreign currencies that are traded on foreign exchange markets globally.
2. Exchange rates represent the price at which one country's currency can be traded for another's. Nominal exchange rates are the relative prices of currencies, while real exchange rates also account for differences in inflation between countries.
3. The Big Mac Index published by The Economist uses the global price of McDonald's Big Macs to estimate purchasing power parity exchange rates between currencies based on the theory that the same good should cost the same in different countries when prices are adjusted for exchange rates.
4 supply function
The document discusses the economic concept of supply. It defines supply as the quantity of a good or service that producers are willing and able to sell at a given price over a specific period of time. The document outlines several key determinants of supply, including the price of the good, prices of related goods and factors of production, producers' objectives, and external factors. It then presents the supply function and law of supply, which states that suppliers will provide a greater quantity at a higher price, all else being equal. The document concludes by explaining demand-supply equilibrium and how excess supply or demand can create inefficiencies in the market.
Price Elasticity of Demand
This lesson on price elasticity of demand contains an explanation of elasticity, how to solve for both arc and point price elasticity of demand, its relation to total revenue, and the factors that influence the elasticity of demand for a product or service.
1 Aggregate Demand 4. Explain the intuition behind the wea.docx
1 Aggregate Demand
4. Explain the intuition behind the wealth, interest rate, and exchange rate effects.
The intuition behind the real wealth effect is that when the price level decreases, it takes less
money to buy goods and services. The money you have is now worth more and you feel
wealthier. So, in response to a decrease in the price level, real GDP will increase. More
formally, this means that when households’ assets are worth more in terms of their
purchasing power, they are more likely to purchase more goods and services.
The opposite happens when the price level increases. If the price of everything increases, but
the number of dollars you have doesn’t, then you have to cut back on spending. Some
shorthand of this chain of events can help us wrap our heads around this:
PL↓→real wealth ↑→consumption increases→move right along AD curve
The intuition behind the interest rate effect is that when the price level decreases, you need
less money in your pocket to buy stuff. The less money you need to keep on hand to buy
stuff, the more money you are going to keep in a bank. Banks pay interest to try to lure
people to deposit their money in banks. So, if you are going to keep more money in the bank
anyway, banks don’t have to offer as much interest in order to convince you; that drives
interest rates down. As a result, businesses and households spend more money on investment
and “big ticket” items that are interest sensitive, like X, Y, and Z. So, once again, a decrease
in the price level will increase real GDP.
On the other hand, a higher price level will drive up interest rates. Remember how a higher
price level would make everyone’s dollars are worth less, and they cut back on consumption?
Well, what if they didn’t want to cut back on consumption. Instead, maybe they sell off some
other asset like a bond to try to get more money. The problem is, every other bondholder is
also trying to sell off their bonds, so there are no buyers! Anyone who wants to issue a new
bond is going to have to do something to try to attract buyers. The way to do that is to raise
the interest rate that is offered. All of that excess demand for money leads to an increase in
the interest rate.
Finally, the intuition behind the exchange rate effect is that a decrease in the price level in
country A makes its goods cheaper to country B, so country B buys more of country A’s
exports. When the price level in one country goes down, its goods are suddenly more
attractive to every other country. It’s like the whole country is on sale! Since that country’s
goods are suddenly cheaper, their exports go up.
2 Multipliers
4. Households in Iron Island save 10% of every additional dollar in income that they
receive. What will happen to aggregate demand Maggietopia if there is a $4 billion
increase in lump-sum taxes?
Note: Please answer this question on your own.
3 Short-run Aggregate Supply (SRAS)
.
July03
- The document outlines a class on supply and demand, including reviewing concepts from the previous class and previewing what will be covered and tested on.
- Key concepts covered are the demand and supply curves, how equilibrium is determined by the intersection of the curves, and how shifts in the curves impact equilibrium price and quantity.
- The assumptions of the supply and demand model are discussed, including that quantity responds to price, resources are scarce, and people act rationally.
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一.毕业证【q微741003700】成绩单、使馆认证、教育部认证、雅思托福成绩单、学生卡等！
二.真实使馆公证(即留学回国人员证明,不成功不收费)
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3:国家专业人才认证中心颁发入库证书
4:这个认证书并且可以归档倒地方
5:凡事获得留信网入网的信息将会逐步更新到个人身份内，将在公安局网内查询个人身份证信息后，同步读取人才网入库信息
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Purchasing Power Parity
- 3. Spot Rate
- 4. Forward Rate
- 7. Inflation
- 8. Perfect or Efficient markets
- 10. Does inflation affect exchange rate?
- 11. If it does, how?
- 12. Does interest rate affect exchange rate?
- 13. If it does, how?
- 15. Purchasing Power Parity The PPP theory focuses on the inflation – exchange rate relationships. If the law of one price holds for all goods and services, we can obtain the theory of PPP. LAW OF ONE PRICE
- 16. Law Of One Price Law of one price states “ In an efficient all identical goods must have only one price” Identical goods should sell at identical prices in different markets If not, arbitrage opportunities exist Assumes that there will be no shipping costs, tariffs, taxes….etc. Relates to a particular commodity, security, asset etc..
- 18. Historical back drop A Swedish economist Gustav Cassel introduced the PPP theory in 1920s Countries like Germany, Hungary and Soviet Union experienced hyperinflation in those years due to World War I The purchasing power of these currencies declined sharply The currencies depreciated sharply against more stable currencies like the US dollar
- 19. Absolute PPP Law of one price extended to a basket of goods If the price of the basket in the U.S. rises relative to the price in Euros, the US dollar depreciates
- 20. Have a look If the price of the basket in the U.S. rises relative to the price in Euros, over a period of three days May 21 : s€/$ = P€ / PUS = 1235.75 € / $1482.07 = 0.8338 €/$ May 24: s€/$ = 1235.75 € / $1485.01 = 0.83215 €/$ Has the US dollar appreciated or depreciated?
- 21. Mathematically , Absolute PPP postulates that Pais the general price level in country A Pbis the general price level in country B sa/bis the exchange rate between currency of country A and currency of country B sa/b = Pa / Pb
- 22. Statement The absolute PPP postulates that the equilibrium exchange rate between currencies of two countries is equal to the ratio of the price levels in the two nations. Thus, prices of similar products of two countries should be equal when measured in a common currency as per the absolute version of PPP theory
- 23. Deviations from absolute PPP
- 24. Big Mac and PPP