Parity Theories - Essay Example

Only on StudentShare

Extract of sample
Parity Theories

This simply indicates uniformity in the prices of fixed number of goods and services and exchange rate of two countries. The roots of this theory lie in the law of one price, which says that homogenous goods should have identical prices universally not including any carrying or shipping costs under the prevalence of perfect competition if the pertinent national prices are stated in a common currency. The law of one price has certain conditions, which must exist in order for this law to be applicable. Firstly, it is the presence of competitive market for goods and services in two countries (EconomyWatch, 2010). Secondly, presence of goods and services that two countries can trade between themselves and lastly, checking of transportation and other operational expenses, which are obstructions in trade. Taking example of McDonald’s Big Mac hamburger prices around the world, one can understand this concept. For this the one should take the prices of all the countries in common currency, therefore dollar would be the appropriate one as every currency’s appreciation or depreciation is measured in terms of dollar (Taylor and Taylor, 2004, pp.135-158). In January 2004, the price of hamburger in United States was $2.80 where as in China it was $1.23, least expensive of all countries, this shows that China’s currency was underrated by 56%. ...
Download paper

Summary

Purchasing power parity theory of exchange rate is based on the idea of equivalence in the purchasing power of countries, which leads to equilibrium in the exchange rate between the currencies of countries…
Author : melisa00

Related Essays

International Finance
There are mainly three types of foreign exchange risks or exposures.This is also known as accounting risk, which a firm faces when it has subsidiary operations in other countries. When the foreign exchange movements adversely affect the translated values of assets and liabilities of the subsidiaries, it becomes an unwanted exposure for the parent company’s consolidated financial statements. This risk can be hedged by using currency futures, currency swaps etc.Transaction Exposure: This exposure is related to the future payments and receipts in foreign currency. Companies many a times limit...
5 pages (1255 words) Assignment
Public Interest in Theories of Regulation
Theories of regulation help us to find solutions so that investors do not get exploited. Public Interest in theories of regulation pertains to allocation of resources in a regulated manner to safeguard the best interests of public. These distributions may be haphazard or aimed towards satisfying fewer people’s interests, if not regulated. This failure of markets may occur due to several reasons such as: Absence of competition Monopolies try and create barriers of entry to other interested firms Asymmetry of information Products of public goods are produced The scarce resources get deployed...
13 pages (3263 words) Essay
Voluntary Disclosures and Accounting Theories
Accounting principles are based upon some principles and one of the important principles of accounting is full disclosure principle. As per the full disclosure principles the companies must disclose all the relevant information about the company like the financial statements, accounting policies followed, additional information etc. Apart from the various mandatory disclosures many companies discloses many voluntary information like sustainability report, cost of training employees etc. All these activities add value to the organisation and thus are important for the stakeholders to take an...
5 pages (1255 words) Essay
International Banking
Exchange rate risk is the risk to earnings or capital arising from movement of exchange rates. The need to manage the exchange rate risk is very crucial for any bank and it has generally been observed that the exchange rate risk management form the integral part of the risk management policies of all major global banks. [Gorton, G. & Rosen, R., 1995] When a multinational operates in such a number of markets, internationally, it is exposed to a great deal of risks, and in order to operate as per its predetermined objectives, the management of these risks is of prime importance.[ Moffet, M. &...
5 pages (1255 words) Essay
financial accounting theories in a real life
It is used to communicate various aspects of the business. There are diverse kinds of theories that prevail in financial accounting. It has been observed that there prevails no accounting theory which is a universally accepted theory of financial accounting. Different researchers have dissimilar views regarding financial accounting theories (McGraw-Hill, 2006). There are different types of accounting theories that can be implemented in real life scenario. One of them is the Repo 105 theory. This theory is used by many of the companies. Moreover, it needs to be mentioned that the misuse of such...
8 pages (2008 words) Assignment
Discuss the theory of purchasing power parity, by considering its various forms and examining critically its assumptions and the
The rate of exchange between two currencies can be termed as equilibrium when there is an equivalence in the purchasing powers of these countries at the domestic level (Taylor & Taylor 2004, p. 135). The theory of Purchasing Power Parity The formula for calculating purchasing power parity is as follows: S=P1/P2, where S refers to the rate used to exchange currency one with currency two, P1 is the price that good “x” costs when purchased in currency 1, and P2 is the price at which good “x” sells when purchased in currency 1. Based on the Purchasing Power Parity, there is an adjustment...
10 pages (2510 words) Essay
Interest rate convergence / Covered or uncovered interest rate parity
made significant losses on acquisitions of foreign institutions and on holding of asset-based securities (OECD, 2009, p.30). By mid 2007, the financial disorder with its rigorous liquidity and credit crunch seemed to detain to financial markets and institutions in the U.S., U.K., Western Europe, Asia and many other countries. It resulted in the failure of key businesses, downturn in the economic activity and decline in the consumer wealth. During this period economies globally slowed, as international trade declined and credit tightened. This paper will focus on the effect of financial crisis...
13 pages (3263 words) Dissertation
Got a tricky question? Receive an answer from students like you! Try us!