The value of a country's needs and its currency is the amount of goods and services by a unit of currency in the country can buy decision, namely the decision by its purchasing power, and therefore the exchange rate between two currencies can be expressed as the ratio of the purchasing power of the two currencies. However, the size of the purchasing power is reflected by the price levels. Based on this relationship, domestic inflation will mean their currencies depreciate relative to foreign currencies. Relative PPP definitely makes up for some deficiencies in terms of purchasing power parity. Its main points can be simply stated as: currency exchange rate between the two countries will be based on the difference between the two countries the rate of inflation and adjust accordingly.
2002). PPP is an alternative theory for predicting movements in a spot exchange rate over time. Zhang and Zou (2014) use different measurement in testing absolute purchasing power parity. They determined that the currency value of foreign exchange depends on the relative purchasing power of each country currency and still have many other considerations may influence on exchange rate. David, et al.
CAPITAL MARKET THEORY The Concept of Capital Market Theory is that it tries to describe and evaluate the advancement of capital and likewise financial market over a certain period of time. The Capital Market Theory in general tries to clearly define and foresee the development and advancement of capital. It is also known to be a common term that is used for the study of securities. In terms of the relationship between rate of returns seeked by all investors and likewise the inheritance of risk that comes along. The main purpose of this capital market theory model is that seeks to “price assets” but more popularly “shares” among investors.
In Macroeconomic, the consumer choices is the most important facts such as what they would like to buy, how they choose and whom actually they would like to buy commodities. (2) Macroeconomics Macroeconomics analysis the behavior of the economic system as a whole. Macroeconomics concerns with aggregates behavior like the national incomes, the governmental taxation and subsidies gross national product (GNP), growth of nation, cyclical fluctuation, inflammation and etc., There are two sets of tools in macroeconomic: fiscal and monetary policy. Macroeconomic policy achieve the economic goals
Preferences: A recursive-utility function is used to understand the agent’s risk preferences. This utility function takes into account current consumption, risk-aversion coefficient, subjective discount factor and elasticity of intertemporal substitution (IES - impact of return on savings on current consumption). The result of this was if risk aversion is more than the reciprocal of IES, then an agent will prefer early resolution of consumption uncertainty, and vice-versa 2. Consumption Dynamics: Here, the model brings out the relationship between both the uncertainties, asset prices and the economic growth. It comprises of: (i) decomposition into good and bad components of total macroeconomic uncertainty, affecting good and bad consumption shocks respectively, (ii) direct impact on future economic growth of macroeconomic volatilities The result of the model was when good volatility rises, future consumption growth rate rises too and a rise in bad volatility reduces future economic
Macroeconomics is concerned primarily with the forecasting of national income, through the analysis of major economic factors that show predictable patterns and trends, and of their influence on one another. These factors include level of employment/unemployment, gross national product (GNP), balance of payments position, and prices (deflation or inflation). Macroeconomics also covers role of fiscal and monetary policies, economic growth, and determination of consumption and investment levels. The function of the economy or the performance of the economy is reflected through the Trade Coclé or Business cycle. The trades cycle or business cycle are cyclical fluctuations of an economy.
Foreign exchange is significant in many different parts of the economy. It is mainly used in international trade and debt servicing. It is also important in the insurance industry because there are plans, such as multi-currency plans, which are designed with benefits and premiums define in terms of different currencies. Also, investment banks and multinational companies loan and/or invest part of their capital in terms of the foreign currency (BSP, 2008). Foreign exchange rate is complex and hence it is heavily studied in international macroeconomics.
International trade affects the macroeconomic equilibrium of the national economy. The indicators of world trade depend on such macroeconomic variables as national income, price level, employment, aggregate supply and demand, investment, consumption and
Macro fundamentals are believed by the economists to determine forex rates such that a nation’s currency directly affects economic growth rate, trade balance, inflation rate fall, and interest rate. He suggested two theories that can come up with a model for determining the forex rate. The first theory is the quantity theory of money. This theory states that an increase in money supply tends to increase the domestic price level and it can come up with a model for the long-run equilibrium of forex rate. However, this theory cannot take into account the fluctuations of forex rate.
These factors determine the flows of FDI in the country for the economic benefits of the country. The higher return helps the employees to reinvest in the sector which actually act as the beneficial factors for the country’s economy. However, different authors think about the market size differently. Chakrabarti (2001) believes that for the effective usage of the resources requires the large markets in the country. The larger the markets, the better will be the utilization of resources and this ensures the economies of scale in the market.