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.

Purchasing Power Parity - Essay Example

Comments (1) Cite this document
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.

Download full paperFile format: .doc, available for editing
Polish This Essay91.2% of users find it useful
Purchasing Power Parity
Read TextPreview

Extract of sample
"Purchasing Power Parity"

Download file to see previous pages 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 the excel is then imported by selecting the Proc/Import/Read Text-Lotus-Excel options of the main menu and choosing the dataset Data_Canada_PPP.xls. The number of series is entered as 3 in the Excel spreadsheet import dialogue box as shown in fig2. The data is imported successfully and is verified with the original data in the excel sheet by opening the generated data as shown in fig 3.

Fig 1 Generate New Workfile

Fig 2 Enter the number of series of Data

Fig 3 Verifying the imported data
2) Generating Real Exchange Rate qt
Real Exchange Rate qt is obtained by the formula:
qt = st – pt + pt* -------- 1
st = log(Exchange_rate) -------- 2

pt = log(CPI_Can) -------- 3
pt* = log(CPI_US) -------- 4
The formulae 2 to 4 are first generated using the Genr option in the workfile. The value of qt is then generated using the formula 1. The generated qt is shown in fig 3.
Fig 3 Value of qt
3) Plotting the graph (qt)
Fig 4 shows the graphical view of series of values of qt.
This can be tested using: Interpretation from Graphical representation: A non-stationary series produces lines with definite upward and downward trend with the passage of time, whereas a stationary series does not produce any such lines. Observing the Correlogram or Autocorrelation function (ACF): For a stationary process, the ACF will decline to zero in a quicker fashion whereas for a non-stationary process, the ACF declines in a linear fashion. From the graphical representation of real exchange rates between Canada and US shown in fig 4, it can be noted that the real exchange rate is likely to have some sort of random walk-up and walk-down pattern over the period of time. The presence of random walks indicates that the series qt seems to show non-stationarity in behaviour. However, the random walk does not show any increasing or decreasing trend. 4) Unit Test Root Non-stationarity of a process is characterized by the presence of unit root. In order to test whether the process is stationary or not, it would suffice if we can check for the presence of unit root. This check can be performed by employing Augmented Dickey-Fuller’s test. The overall objective of this test is to test the null hypothesis that ? = 1 in: yt = ? yt-1 + ? + ut against the one-sided alternative ? < 1. So we define the hypothesis as H0 : yt = yt-1 + ? + ut (qt is non-stationary, ? =1) H1 : yt = ? yt-1 + ? + ut (qt is stationary. ? < 1) Subtracting the above equation with yt-1, we get the simplified equation as: ? yt = ? yt-1 + ? + ut Where ? = ?-1. Now the hypothesis for the presense unit roots can be written as: H0 : ? =0 (qt contains a unit root and is ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Purchasing Power Parity Essay Example | Topics and Well Written Essays - 15000 words”, n.d.)
Retrieved from https://studentshare.org/statistics/1394441-quantitative-methods-in-finance-using-eviews
(Purchasing Power Parity Essay Example | Topics and Well Written Essays - 15000 Words)
“Purchasing Power Parity Essay Example | Topics and Well Written Essays - 15000 Words”, n.d. https://studentshare.org/statistics/1394441-quantitative-methods-in-finance-using-eviews.
  • Cited: 0 times
Comments (1)
Click to create a comment or rate a document
alvahtowne added comment 4 months ago
Student rated this paper as
This essay was always my weak point. I could never finish it successfully. Still, after I found this precise paper, I understood how it should be done. So, I performed my research afterward and completed the essay in several hours, instead of months as it was previously.
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
Discuss the theory of purchasing power parity, by considering its various forms and examining critically its assumptions and the
The Purchasing Power Parity refers to a theory of economics, which is used to estimate the adjustment that should be applied on the rate of exchange between nations. The main aim of using the theory to estimate the equilibrium emanates from the desire to ensure harmonisation in the exchange, as well as meet the purchasing power of each of the countries.
10 Pages(2500 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
Power Purchase Parity
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.
14 Pages(3500 words)Essay
Exchange Rate and Puchasing Power Parity Theory
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.
4 Pages(1000 words)Essay
Purchasing Power ParityBig Mac Index
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).
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 evience suggests that PPP hold both in the short and long run
due to various market frictions” (Dwyer, Fisher, Flavin & Lothian, 2005); PPP fails to hold more in short run than in long run (Amara & Murphy, 2005; Anorou, Braha & Ahmad, 2002; Culver & Papell, 1999; Caetano, Moura & Da Silva, 2004; DEUTSCHE BUNDESBANK, June 2004); “there
3 Pages(750 words)Essay
Purchasing Power Parity
We used data from UK since previous research has shown that they are the most commonly used data set to test for Purchasing Power Parity (PPP). Before conducting any serious analysis we ran some basic statistics. The table below gives a summary of the
5 Pages(1250 words)Term Paper
Let us find you another Essay on topic Purchasing Power Parity for FREE!
Contact us:
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