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Purchasing Power Parity Across Countries - Research Proposal Example

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From the paper "Purchasing Power Parity Across Countries" it is clear that most of the experts concur on the close association between real exchange rates and purchasing power parity in that deviations in PPP approximate deviations in real exchange rates…
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Purchasing Power Parity Across Countries
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Download file to see previous pages The purpose of this study is to examine how much significance may be attributed to real exchange rates in assessing differences in purchasing power parity between various countries. An assessment of the correlation between the two variables will be undertaken in order to determine whether they impact each other in the short and long term.
The purchasing power parity between various nations depends to a great extent upon various factors which are the indicators of how well the economy is performing, such as imports-exports, consumption, productivity and trade, policy instruments, world interest rates and real exchange rates. The correlation between some of these macroeconomic variables is expressed in the Harbinger-Laursen-Metzler or HLM effect which is also characterized by variability of real exchange rates and is based upon the Keynesian perspective of the open economy. (Persson, Torsten and Svensson, 1985). In these open model approaches, such as the HLM model, the HLM effect occurs when in response to a worsening of trade, users and agents tend to borrow money to maintain levels of spending rather than adjusting their consumption downward, because of the perception existing among these consumers and traders that such an effect is purely temporary (Obstfeld, 1981). Fluctuations in the real exchange rates can also be caused due to wealth and substitution effects.
Within an open economy, purchasing power behavior and parity between countries are affected by the changes in real exchange rates which are believed to be conditional upon information such as estimates of income and the elasticity of import. An artificial economy is taken as the reference point from which income and price elasticity are estimated. ...Download file to see next pagesRead More
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