Explain why relative ppp is useful, International Economics

Assignment Help:

Q. Explain why Relative PPP is useful when comparing countries that base their price levels on different product baskets.

Answer: For instance If the U.S price level increase by 10% over a year while Europe's rises by only 5% relative Purchasing Power Parity (PPP) predicts a 5% depreciation of the dollar against the euro. This now cancels the 5% by which U.S inflation surpass European leaving the relative domestic and foreign purchasing powers of both currencies unchanged.

(E$/E,t - E$/E,t-1)/E $/E,t-1 = _US,t - _E,t among dates t and t - 1.

Relative Purchasing Power Parity (PPP) is useful when comparing countries that base their price levels on different product baskets. Relative Purchasing Power Parity (PPP) may be valid even when absolute PPP is not.


Related Discussions:- Explain why relative ppp is useful

How a central bank fixes the exchange rate, Q. How A Central Bank Fixes the...

Q. How A Central Bank Fixes the Exchange Rate? Answer: The Central bank should always be willing to trade currencies at the fixed exchange rate with the private actors in the f

WTO - TRIPS, What are the benefit derived by Indian Corporates due to WTO -...

What are the benefit derived by Indian Corporates due to WTO - TRIPS?

What can explain failure of relative ppp to hold in reality, What can expla...

What can explain the failure of relative PPP to hold in reality? Answer: Government procedures of the price level differ from country to country. One cause for these differe

One of the problems in the opportunity cost approach and int, essay should ...

essay should be based on one of the problems mentioned into Haberler (1950) with references to the main assumptions of the general equilibrium analysis

Pestel framework, The PESTEL is a strategic development technique that prov...

The PESTEL is a strategic development technique that provides a helpful framework for analyzing the environmental pressures on an organization (Rogers, 1999). PESTEL framew

Comparative advantage in the land-intensive product, Q. Factor-intensity r...

Q. Factor-intensity reversals define a situation in which the production of a product can be land-intensive in one country, and relatively labor intensive in another ( at given re

The wage rate, Q. Suppose the relative price of good 1 falls relative to th...

Q. Suppose the relative price of good 1 falls relative to the price of.  What happens to the wage rate? Answer: The labour component of the price of 1 is bigger than that of p

Effects of a temporary increase in the european money supply, Q. Using a fi...

Q. Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of a temporary increase in the European money supply on the dollar/euro

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd