In the journal, “An Empirical Test of Purchasing Power Parity in Selected African Countries - a Panel Data Approach,” the author discusses the applicability of the Purchasing Power Parity theory in selected African countries. The author, Beatrice K. Mkenda has a vast focus…
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Purchasing Power Parity In the journal, “An Empirical Test of Purchasing Power Parity in Selected African Countries - a Panel Data Approach,” the author discusses the applicability of the Purchasing Power Parity theory in selected African countries. The author, Beatrice K. Mkenda has a vast focus on the panel unit root-test. The paper aims at testing whether the real exchange rates that are depicted are mean reverting or not. In the article, the author goes through a number of selected African countries, pointing out the application of the Purchasing Power Parity. In her quest 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). The theory, PPP, relates a country’s exchange rates to the relative price levels of other respective nations. For this reason, any nation with a high level of inflation has a depreciating currency, and thus loss of its value. The model has been questioned, and it fails to apply in a variety of cases, where the theory does not hold empirical evidence in regards to a country’s economic performance (Taylor 440). In the article, African countries are seen to focus on minimal manufacturing activities, and rather rely on imported products. The countries face a number of limitations, among them being price takers rather than the decision makers. The nations take the market prices, affecting the states of their economy from time to time. Another major hindrance is the fact that these countries often make deals with exporters, where they get foreign aid, but have to rely on the country’s products. At such situations, the African nations have no choice but to take the fixed prices set in markets. Such limitations result to the depreciation of the countries’ currencies in the markets. Consequently, their exchange rates deteriorate and their purchasing power is therefore affected by the weakening currency. The author explains the mechanism of the Purchasing Power Parity Theory and its institution in the African continent. Through the econometric method, the report develops a number of findings, which help develop a conclusion for the research. From the report findings, African nations have a negative multilateral index, in terms of exports, imports and trade weighted indices. The bilateral index is also negative, proving that the countries have a lower purchasing power than average. It, therefore, proves the reason for the deterioration of the economies, and the volatility of the markets in these nations (Mkenda 21). The currencies of most African markets are determined by the prices in international markets, owing to the fact that the countries are more of price takers rather than the setters. The markets fluctuate often because of the constantly changing markets in the global scale. The information is depicted from the panel unit root, maximizing the credibility of the report findings (Mkenda 19). The author successfully defines the application of the PPP theory using African nations and explains the reasons for the constant fluctuations. Through the panel unit root-test, the report successfully proves the credibility of the Purchasing Power Parity Theory as a tool for determining foreign exchange rates and the purchasing powers of different economies. The author depicts all the information to the reader, bettering the understanding and offering an empirical conclusion. Work Cited Mkenda, Beatrice Kalinda. An empirical test of purchasing power parity in selected African countries-A panel data approach. No. 39. 2001. Taylor, Mark P. "Purchasing power parity." Review of International Economics11.3 (2003): 436-452.
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...?I. PurchasingPowerParity 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. A new Eviews workfile is generated from the main menu of the Eviews by selecting File/New/Workfile, which opens up the create workfile dialogue box. Dated-regular frequency is chosen as the workfile structure type, frequency is chosen as monthly with the start date as 1990-1 and end date as 2011-03 as shown in fig1. The data from...
...An empirical evaluation of the PurchasingPowerParity
This paper analyses the empirical validity of the purchasingpowerparity theory, i.e., the notion that the exchange rate between two countries is determined by the relative price levels in these two countries, using a time series error correction approach. Using monthly data on the exchange rate of the Japanese Yen and US Dollar and the respective Consumer Price Index values to represent the price levels over a period of 1960-2010 time series econometrical analysis is employed to investigate evidence of the theory. Although no support for absolute or relative...
...PurchasingPowerParity and the "Big Mac Index" Introduction When we go at a shop to buy something, we expect to get that product at a value we perceive to be associated with it. Also when we travel abroad, we expect the same product to cost us the same value that we get in the home country. Investopedia defines this phenomenon as the PurchasingPowerParity which in economic terms is a "theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasingpower."
In other words purchasing...
...The Role of the PurchasingPowerParity in the Real World In its strictest definition, the theory of the purchasingpowerparity s that, "the exchange rate between countries' currencies equals the ratio of their price levels, as measured by the money prices of a reference commodity basket" (Krugman and Obstfeld, 2000). 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 purchasingpower...
Figure 2. Neighboring Exporting-Importing countries of Thailand
1.3. Research Objective
To analyze the net of developing country’s (Thailand) choice of exchange rate regime on their exports performance during 1995-2005
To develop model to explain whether the PurchasingPowerParity of Thai baht (Japan, the US and EU).
1.4 Scope and Limitation of Study
This study concentrates on the Thailand exchange rate regime and the purchasingpowerparity of Thai baht. The available data used in this study collected from Bank of Thailand, Economic and Labor Market Information Bureau U.S. Department of Labor, UK National...
...PURCHASINGPOWERPARITY "Purchasingpowerparity" or "PPP" expresses the notion that with a unit of purchasingpower, say one dollar or one euro, it should be possible to purchase the same bundle of goods and services anywhere in the world (Neary, 2004). In economics, purchasingpowerparity (PPP) is the method of using the long-run equilibrium exchange rate of two currencies to equalize the currencies purchasingpower. It is based on the law of one price, the idea that, in an efficient market, identical...
...PURCHASINGPOWERPARITY By of the of the School Data We collected monthly consumer price index (CPI) time series data spanning from 1st January 1955 to 1st December 2013 from the Federal Reserve Economic Data. We however manipulated the data to have them in annual form and computed PurchasingPowerParity (PPP) using 2002 as the index (base) year. We used data from UK since previous research has shown that they are the most commonly used data set to test for PurchasingPowerParity (PPP).
Before conducting any serious analysis we ran some basic statistics. The...
...of the paper is a design of a framework for testing for the absolute PPP and relative PPP following monetary approach. The second part is a brief summary of the interest rate parity conditions and their underlying logics and implications. This displays the application of the exchange rate used in forward contracts differ from the current spot rate. The emphasis is on the reasons for difference between the forward rates and the future spot rate expected by investors.
Part 1: Empirical Study
(Selected Question: Question 2)
1. Test for Long-term PurchasingPowerParity (PPP)
This study investigates the absolute and the relative PPP for...
.... Nevertheless, the concerned country lacks the ability of setting monetary policy in regard to other local considerations. In addition, the fixed exchange will rate will, to a greater extent also secure a nation’s trading terms, inspite of economic variations that exist between itself and its trading partners (Pintev, 2003).
2. Purchasingpowerparity (PPP)
Purchasingpowerparity can be described as an element of some economic theories as well as a method that is used in determining the relative value of various currencies. PPP claims that various exchange rates between diverse currencies are in balance when their respective...
It states that the country which is having high inflation rate is weak in terms of currency because inflation reduces the real purchasing power of a nation’s currency. It predicts a relationship between the inflation rates of two countries over a specified period and the movement in the exchange rate between their two currencies over the same period which means that the exchange rate of two currencies reflects the effect of inflation rate (Murphy, p.1). Absolute PPP states that the value of 2 currencies changes in contrary proportion to the changes in the ratio of price levels. On the other hand relative, PPP predicts a relationship between the inflation rates of two countries over a specified period and the movement in t...
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