Purchasing power is clearly determined by the relative cost of living and inflation rates in different countries. Purchasing power parity means equalizing the purchasing power of two currencies by taking into account these cost of living and inflation differences. According to Lucian, Florina and Laurentiu (2014), purchasing power parity theory states that when each country’s purchasing power is same, the two currencies exchange rate will be same in equilibrium. The exchange rate has an important relationship to the price level because it represents a link between domestic prices and foreign prices, for example, ignoring taxes, subsidies and shipping costs (Dalia, et al. 2002).
THEORETICAL EXPLANATION Currency Union is defined as a situation where either several small countries(called clients) adopt the currency of a large country (anchor) or many countries create a new currency and a joint Central Bank. It affects price, trading pattern and economic policies. There is a net welfare gain when the potential benefit from joining a currency union is greater than the loss. As stated earlier, the benefit is reflected from an increase in consumption and output due to trade creation, as well as by providing a credible monetary policy anchor. While the cost is attributed to consumption and output fluctuations from the loss of an independent monetary policy.
Name: Imabong Effiong-Akpan Cohort Group: A (8:30 class) Number of Words: Title: Compare and contrast the classical (Ricardian model) and Heckscher-Ohlin (HO) theories of the commodity composition of trade. Discuss the differences in assumptions, post trade production points, and the effects of trade on the distribution of income The Ricardian Model shows that a developed country can compete against a less developed country which is due to comparative advantage, even though the less developed country pays its workers lower wages. The Heckscher-Ohlin model seeks to explain how countries should operate when resources are not distributed equally around the world. Assumptions According to the Ricardian model, the labor theory
Exchange Rate Exchange rate is the price of a domestic currency in relation to foreign currency. It tells us the amount of rupee that is needed to buy, say, a US Dollar. When the value of Rupee appreciates in relation to the Dollar, the exchange rate is said to have fallen. Similarly, when the value of Rupee depreciates against the Dollar, the rate is said to have risen. Nominal and Real exchange rate Nominal exchange rate is simply the price of domestic currency in relation to another currency.
1. Quantity Theory Of Money DEFINITION of 'Quantity Theory Of Money ' An economic theory which proposes a positive relationship between changes in the money supply and the long-term price of goods. It states that increasing the amount of money in the economy will eventually lead to an equal percentage rise in the prices of products and services. The calculation behind the quantity theory of money is based upon Fisher Equation: Calculated as: Where: M represents the money supply. V represents the velocity of money.
QUESTION 1 Define net price. How do you calculate the list price when the net price and trade discount rate are known? What are the steps to calculate the net price equivalent rate and then how to get the net price? What are the steps to calculate the single equivalent discount rate and then how to get the trade discount amount? Give an example of each net price equivalent rate and single equivalent discount rate.
Cassel, (1920) developed the relative version of the PPP, which he put as the rate of exchange that is determined between two countries at a point which expresses the equality between their respective purchasing power of the two currencies. The relative version is usually referred to as a moving par and not a fixed par, thus a change in the price level the exchange rate will also change. According to Cassel, (1920) the described the determination of the PPP as a quotient of the purchasing power of the different currencies. Putting more succinctly, the PPP predicts the PD (E) = PF. (PD and PF are the price index of the domestic currencies and foreign currencies and E is the exchange rate), as with other parity, the degree of to which the arbitrage imposes on the PPP is a function of the transaction
CHAPTER THREE THEORETICAL FRAMEWORK AND METHODOLOGY 3.1 Theoretical frame work The basic theoretical frame works are the monetarists’ theory of Inflation, and structural rigidity theory of inflation. Monetarists’ theory of Inflation The monetarists emphasise the role of money as the principal cause of demand pull inflation. They contend that inflation is always a monetary phenomenon. They used a simple quantity theory of money, by employing familiar identity of Fisher’s Equation of exchange: MV=PQ Where M is the money supply, V is the velocity of money, P is the price level, and Q is the level of real output. Assuming V and Q as constant, the price level (P) varies proportionately with the supply of money (M).
The variables that are held settled in the supply schedule are input costs, technology, price expectations, and government taxes or subsidies. To get the information for a supply curve, we change just the cost of a good and watch how a maker reacts to the price change. The individual supply curve is positively sloped, reflecting the law of supply. The law of supply: Like the law of demand, the law of supply shows the amounts that will be sold at a certain price. This means higher the price, higher the quantity supplied.
Variables like relative interest rate ,term of trade ,trade balance and net capital inflow were tested using regression model ,and panel data regression model which is common effect model ,fixed effect model, and random effect model to determine the variable that effect the Exchange rate . Theory From this article that I analyse macroeconomic theories that’s discovered was Exchange rate, inflation, investment, GDP, Price level and interest rate. Exchange rate: The price of a nation’s currency in term of another currency Inflation: A condition where price of goods and services rising nonstop. Investment: Investment is an asset or item that is purchased with the hope that it will create income or appreciate in the future.