purchasing power parity

Examples of purchasing power parity in the following topics:

• Finding an Equilibrium Exchange Rate

  • Purchasing power parity is a way of determining the value of a product after adjusting for price differences and the exchange rate.
  • The concept of purchasing power parity is important for understanding the two models of equilibrium exchange rates below.
  • Like purchasing power parity, the balance of payments model focuses largely on tangible goods and services, ignoring the increasing role of global capital flows .

• Purchasing Power Parity (PPP) Theory

  • Purchasing Power Parity (PPP) Theory is based on the Law of One Price.
  • Nevertheless, the Purchasing Power Parity helps predict changes in exchange rates.
  • Thus, Purchasing Power Parity estimates the equilibrium exchange rate.
  • Economists expand the Purchasing Power Parity to include many products in a society.
  • The Economist publishes the Big Mac Index, based on the Purchasing Power Parity.

• Chapter Questions

• Real Versus Nominal Rates

  • The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices.
  • A measure of the differences in price levels is Purchasing Power Parity (PPP) .
  • The concept of purchasing power parity allows one to estimate what the exchange rate between two currencies would have to be in order for the exchange to be on par with the purchasing power of the two countries' currencies.
  • If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power parity (PPP) would hold for the exchange rate and price levels of the two countries, and the real exchange rate would always equal 1.
  • Purchasing Power Parity evaluates and compares the prices of goods in different countries, such as groceries.

• Quantity Theory of Money

  • We can use the Quantity Theory of Money to expand the Purchasing Power Parity Theory.
  • We can substitute the Quantity Theory of Money into the Purchasing Power Parity Equation, yielding Equation 13.

• A Random Walk

  • We will study the random walk, Purchasing Power Parity Theory, the Relative Purchasing Parity Theory, Interest Rate Parity Theorem, and International Fisher Effect.

• GDP per capita

  • When looking at differences in living standards between countries, using a measure of GDP per capita adjusted for differences in purchasing power parity more accurately reflects the differences in what people are actually able to buy with their money.

• Growth Economics

  • Readily available credit due to changes in the nature of acquiring mortgages meant that more and more people were buying homes and financing their purchases with loans.
  • The shift to electric power, internal combustion, automation, new infrastructure, and the rise of the factory changed production forever.
  • Another approach is to use the purchasing power parity method.
  • This means that the U.S. dollar with the purchasing power it had in the U.S. in 1990 is the only currency being used for the comparison.

• Poverty

  • The GNI PPP is the gross national income of a country converted to international dollars using a factor called the purchasing power parity.
  • This map shows the percentage of national populations living on less than $1/day, adjusted for international purchasing power.

• Measuring the Economic Environment

  • Another approach is to use the purchasing power parity method.
  • This means that the single currency being used is the U.S. dollar, with the purchasing power it had in the U.S. in 1990.