We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Nobody downloaded yet

Purchasing Power ParityBig Mac Index - Essay Example

Comments (0)
Summary
In its strictest definition, the theory of the purchasing power parity states 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)…
Download full paper
GRAB THE BEST PAPER

Extract of sample
Purchasing Power ParityBig Mac Index

Download file to see previous pages... The purchasing power parity or the PPP is also loosely explained as the Big Mac index, as introduced by The Economist in the mid-1980s. In the absolute definition of PPP, the Big Mac, a consumer good sold in practically every part of the world, takes the place of the commodity basket. Using this route gives a more simplistic definition of the theory. Therefore, a Big Mac being sold in the United States must have the same price as Big Mac sold in Australia, for example.
Looking at PPP with a monetary approach to the exchange rate will show the behavior of exchange rate in the long run, in terms of the supply of and demand for money. An increase in the national interest rate results in the depreciation of the national currency. Likewise, an appreciation of the country's currency will be resulted by a decrease in the national interest rate.
However, recent data cannot fully support the theory of the purchasing power parity and the law of one price. In the real world, there are trade barriers, free competition, and differences in price levels in different countries, giving rise to difficulty in testing the PPP through government-published price indexes. There are also certain products and services that have consequently become non-tradable goods because of steep international transport costs.
The PPP can also be viewed as a country's real exchange rate, wherein a foreign commodity basket is valuated in terms of a domestic commodity basket. Having all other factors equal, a country's local currency will undergo a long-run appreciation vis--vis foreign currencies, an ensuing scenario when the world demand for this particular country's output increases.
The more common notion of purchasing power parity must be distinguished from a related theory known as relative purchasing power parity, wherein the relationship between the relative inflation rates of two countries and the change in the exchange rates of their currencies comes into play.
An exchange rate that is determined by purchasing power parity gives rise to an equalization of the purchasing power of different currencies in a particular home country. Despite the fluctuations in the market exchange rates, PPP exchange rates are reflected in the long run. However, the difference between the market exchange rates and the PPP exchange rates can be somewhat significant. See this example: The World Bank's World Development Indicators 2005 estimates that one United States dollar is equivalent to approximately 1.8 Chinese yuan by purchasing power parity in 2003. However, based on nominal exchange rates, one U.S. dollar is currently equal to 7.9 yuan. This discrepancy has large implications; for instance, GDP per capita in the People's Republic of China is about US$1,800, while on a PPP basis it is about US$7,204. This is frequently misused to assert that China is the world's second largest economy, but such a calculation would be invalid under the PPP theory. At the other extreme, Japan's nominal GDP per capita is around US$37,600, but its PPP figure is only US$30,615.
The proper estimation of purchasing power parity is made difficult because there is no uniform price level. Also, different people in different countries have varying commodity baskets, ...Download file to see next pagesRead More
Comments (0)
Click to create a comment
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC
Purchasing Power Parity
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.
60 Pages(15000 words)Essay
Global financing and exchange rate mechanisms
Later, UBS Wealth management elaborated the idea of deciding labor wages in any country with a theory that wages should be kept in an amount that he can earn to afford one Big Mac daily in the similar country (Kennedy, 2006). It was suggested that Big Mac index should be used for the Prediction of exchange movement in different countries is termed with a Big Mac that the price of Big Mac should be kept same in every country in exchange rates.
4 Pages(1000 words)Essay
Parity Theories
Running Head: Parity Theories Parity Theories [Writer’s Name] [Institute’s Name] Parity Theories Purchasing Power Parity Theory Purchasing power parity theory of exchange rate is based on the idea of equivalence in the purchasing power of countries, which leads to equilibrium in the exchange rate between the currencies of countries.
8 Pages(2000 words)Essay
Economics Coursework Assignment: Big Mac
BigMac index is used to measure the purchasing power parity of various different currencies all over the world. Incidentally, this paper is also going to use Big Mac (a product of McDonald’s) and will consider various microeconomic and macroeconomic factors that determine its demand and supply.
6 Pages(1500 words)Essay
Global Financing and Exchange Rate Mechanisms
Movement of goods: The Law of One Price assumes that there is no restriction on the movement of goods between countries i.e. it is possible to buy goods in one market and sell them in another.
7 Pages(1750 words)Essay
Purchasing Power Parity and the Big Mac Index
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.
4 Pages(1000 words)Essay
The Exchange Rate Regime of Thailand, purchasing power parity of Thailand
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
16 Pages(4000 words)Essay
Purchasing power parity
It is based on the law of one price, the idea that, in an efficient market, identical goods must have only one price. Purchasing power parity is often called
7 Pages(1750 words)Essay
The Big Mac Index and What About China
Purchasing power parity is one of the most well-known theories of the economics which helps people to understand the value of currency and at the same time compare the prices of various products across the countries. The common
1 Pages(250 words)Case Study
Question and answer
ends that change in transaction rates among currencies should influence the price that customers recompense for a Big Mac in certain, replacing the “basket” with the famous hamburger. The weakness of the Big Mac is not an internationally tradable commodity in that countries
2 Pages(500 words)Essay
Let us find you another Essay on topic Purchasing Power ParityBig Mac Index for FREE!
Contact us:
+16312120006
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us