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Purchasing Power Parity (PPP):
The exchange rate is determined by the relative purchasing power of currency withineach country. For example, if a product X costs Rs. 100 in India and costs $2 in USA,then the rupee - dollar exchange rate is Rs. 50 per $. This illustrates the theory ofPurchasing Power Parity (PPP) wherein two currencies are at purchasing power paritywhen a unit of domestic currency can buy the same basket of goods at home or abroad.There are two versions of PPP, the Absolute PPP and the Relative PPP. The AbsolutePPP postulates that the equilibrium exchange rate between two currencies is equal tothe ratio of price levels in the two countries. Specifically,
R = P1/P2
Where P1 is the price level in the home country and P2 is the price level in the foreigncountry.The Relative PPP postulates that the change in exchange rate is equal to the differencein changes in the price levels in the two countries. Specifically
R' = p1'- p2'
Thus, the percentage change in exchange rate (R´) will be equal to the percentagechange in domestic prices (P´1) minus the percentage change in foreign prices (P´2).
This would be true as long as there are no changes in transportation costs, obstructionto trade (tariff and non-tariff barriers) and the ratio of traded to non-traded goods.Since trade and commodity arbitrage respond sluggishly (due to the above factors),relative PPP can be approximated in the long run.Thus, in the long run, the real exchange rate will return to its average level. In otherwords, if real exchange rate is above long run average level, PPP implies that theexchange rate will fall.
Austrian economics is a brand of neo-classical economics that was established in Vienna during the late 19th century & first half of the 20th century. Austrian economics was strong
Profit Margin A measure of organization performance, profit margins measure the percentage return an organization is earning over the cost of production of the items sold.
EXPLAIN KINKED DEMAND CURVE
explain about rent theory
Amartya Sen''s concept of poverty and welfare.
a) Joan's utility function can roughly be estimated as : U = 60Q 1 3/4 Q 2 2/3 She chooses from two composite commodities Q 1 and Q 2 whose prices per unit are kshs 20
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what is the use of models in economics?
For the purposes of economic analysis, a normal profit contains the cost of the lost opportunity of the next best option allocation of the firms resources. In a purely competitive
bains limit price
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