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. The similarity in price should be in accordance to the currency value in the economies of both countries. This should take consideration of all other prices, such as trade regulations and other factors affecting market demand and supply, which should remain the same between these countries. The absolute Purchasing Power Parity also holds that there the purchasing power of the foreign and the domestic policy should remain the same. This means that there should be no variation in price when a consumer wants to exchange a foreign currency for a domestic currency, or a domestic currency for a foreign currency (Almas 2012, p. 1093). In order to meet the premises for the absolute Purchasing Power Parity, several conditions have to be fulfilled. One condition that must be met is free trade of the goods from each country in the international market. The other condition is that there ought to be a compromise of the price index of the price index for each of the two countries, which will be involved in the exchange of goods. Absolute PPP can result from the differences that exist in weighing, regardless of the fact that the law of one price can hold for certain goods across nations. While determining the absolute purchasing power parity, there is a tendency to examine the changes taking place in the level of the prices, which can be calculated easily (Apte et. al., 2001). Relative purchasing power parity can also be regarded as another form that the theory of PPP takes. Relative PPP focuses on the changes in the inflation rates, which may be anticipated, in relation to changes in the exchange rates between countries. The relative purchasing power parity explores the change and variations in prices that take place between two countries. Relative PPP posits that there tends to be a change in the exchange rates in order to ensure that the variations and differentials, which inflation causes, can be compensated for and covered (Almas 2012, p. 1097). In the relative purchasing power parity, the formula that explains the relationship is as follows: S1/S0= (1 +
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…
I. Purchasing Power Parity
1) Generating Eviews work file
By inspecting the dataset Data_Canada_PPP.xls, it is analysed that the data consists of 3 series Exchange_rate (Canadian dollar to US dollar nominal exchange rate), CPI_Can (Canadian Consumer Price Index) and CPI_US (the US Consumer Price Index) that are observed every month from the year 1990/1 till 2011/3.
They have been instrumental in shortening the required working hours for all and eliminating child labour (Cahill 2007, p. 16; International Labour Organization 2010, p. xv). Gone were the days when workers have to work up to 18 hours per day and gone were the days when children have to work for the same number of hours in factories and slums of the emerging towns of the industrial revolution.
In other words purchasing power parity is a technique used to determine the relative values of two currencies. This is a valuable tool because the value of currency of each nation is different. A Euro or a British Pound can buy more items than a US Dollar.
This paper looks at the definitions of exchange rates and relative pricing as well as their relationship in purchase power parity to discover if the hypothesis of purchase power parity is true. The purchase power parity hypothesis is based on the law of one price, that the equilibrium of trade between boundaries is constant.
Arbitrage has become a scourge of the system which although remains the elusive unicorn for every single investor and business entity in the economic world is an externality that has to be amended in order to ascertain the proper working of the system and its continued existence.
Developed in the early 1900s by a man named Gustav Cassel, this theory was based on the idea that in an ideal world with an efficient market, the same goods should have the same price universally.
The law of one price, which is the building block of the theory of the purchasing power parity, states that, "under free competition and in the absence of trade impediments, a good must sell for a single price regardless of where in the world it is sold" (Krugman and Obstfeld, 2000).
Malay, Mon and Khmer civilizations flourished in the reason prior to the arrival of ethnic “Tai”. Geographically the area of Thailand is 513,115 sq. km; equivalent to the size of France, or slightly smaller than Texas. Beautiful city of Bangkok is the capital of
industry operating nationally and internationally are engaged in framing various marketing strategies that benefits the industry in the most favourable way (Middleton, Fyall, Morga and Ranchhod 2009). In the recent times, it has been apparently observed that family marketing
More specifically, in the UK, a takeover refers to the purchase of a public company whose shares are listed on a stock exchange, contrary to the acquisition of a private business. The three main types of
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