• Home
  • Subjects
  • Finance & Accounting
  • Discuss the theory of purchasing power parity, by considering its various forms and examining critically its assumptions and the

Discuss the theory of purchasing power parity, by considering its various forms and examining critically its assumptions and the - Essay Example

Only on StudentShare

Extract of sample
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 in the exchange rate in order to ensure that similar goods in two countries can be bought at the same price when the same currency is used to express the value of the good. There tends to be various forms that the Purchasing Power Parity takes. Some of the most common forms that this theory takes include the absolute Purchasing Power Parity and the Relative Purchasing Power Parity (Apte et. al., 2001). The concept of Absolute Purchasing Power Parity holds that the rate of currency exchange between two countries remains the same as the price level ratio in these countries. The absolute PPP borrows from the law of one price. Based on one price law, the cost of a certain product should remain constant across several countries. ...
Download paper

Summary

Name: Tutor: Course: Date: University: Discuss the theory of purchasing power parity, by considering its various forms and examining critically its assumptions and the empirical evidence for and against it. Introduction The key proponent of the PPP theory is Gustav Cassel who developed the theory in 1920…
Author : jamel19

Related Essays

Discussion of the various issues related to corporate governance and its impact on financial performance of companies
The analysis includes a comprehensive literature review on corporate governance, its various mechanisms and the impact on financial performance of firms; as well as P.E.S.T analysis of the four companies. Impact of corporate governance mechanisms on modern companies Contents Sr.# Topic Pg. # 1. Introduction 4 1.1. Purpose of the study 5 2. Brief Background 10 2.1. Meaning and definition 10 2.2. Significance and relevance 11 3. Literature Review 14 3.1. Accounting & Finance Theory: Corporate Governance 14 3.1.1 Corporate governance mechanisms 18 3.1.2. Effect of corporate governance on earnings...
54 pages (13554 words) Dissertation
Critical Management Theory(CMT) and its application as an analytical tool for resolving problems in a post-modern organisation
Today managements develop their common goal as per the present requirements of society, environment and community. The increasing concern for corporate social responsibility and community development is one of major evidences in this respect. The Critical Management Theory (CMT) is a reasonable and effective theoretical approach for managing the postmodern organisations. These theories include a wide range of views and ideas that criticize the traditional management theories. CMT attempts to explore, recognise and relate the similar attributes of management basics and critical theories....
8 pages (2008 words) Coursework
Discuss the Proposition that a Company's Dividend Policy is Irrelevant to its Market Value.
Some argue that dividend policy will not affect the wealth of the shareholders, whereas some have the opinion that the decisions about dividend policy will affect the shareholder’s wealth and the firm’s valuation. “Dividend policy refers to the decision regarding the magnitude of the dividend payout, the percentage of earnings paid to the stockholders in the form of dividends. The central, and as yet unresolved, issue concerning dividend policy is whether changes affect firm value” (Dividend Policy 2012). Following are the factors which influence the dividend policy: • Market...
7 pages (1757 words) Essay
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...
8 pages (2008 words) Essay
Recommendation: its advantages and disadvantages
Recommendations To overcome the problem of unsystematic allocation of depreciable amount over the asset’s useful life, SASB has to find a method to allocate the total amount which is to be depreciated over each accounting period in the assets useful life. This can be done by use of either of two methods which include: straight-line method or residual method. Straight-line method is applied by allocating the depreciable amount equally to the whole useful life of the asset. The company should therefore, choose a constant annual depreciation charge, usually a percentage. This will be a...
4 pages (1004 words) Essay
Read the Bourmistrov and Kaarboe (2013) paper and identify its key contribution(s). Critically evaluate and discuss the role of
However, the scope of accounting profession has tremendously changed over the last two decades, and today top managers encourage the accountants to be a management partner instead of a mere technical partner. In addition, the emergence of new business concepts like beyond budgeting has greatly increased the significance of the accounting profession because top executives cannot deal with those newly developed practices without the external support of accountants. This paper will identify the key contributions of the paper written by Anatoli Bourmistrov and Katarina Kaarboe and critically...
10 pages (2510 words) Essay
Purchasing Power Parity
uest to depict the relation between three exchange rate indices, the author goes through all the relevant information pertaining the purchasing power of the chosen countries. The indices include the trade-weighted multilateral indices, import based multilateral indices, and the bilateral indices (Mkenda 39).
...
2 pages (502 words) Assignment
Got a tricky question? Receive an answer from students like you! Try us!