Purchasing Power Parity

The currency of India has been falling much recently against the dollar, as the risk adverse global investors start getting worried about the deficits, as efforts are being made by the central bank to stem the slide of the currency. According to Fact Set data, the rupee hit 54.44 against the dollar, in December, 2011. According to the analyst, it is expected that the rupee may continue to weaken further, as Eurozone jitters dovetail with the raising worries on the slow growth rate, fiscal deficits and the current account.

India’s economy is the fourth largest GDP in terms of purchasing power parity (Gupta and Gupta, 2008:68).

| the monetary unit assumption is that in the long run, the dollar is stable it does not lose its purchasing power. this assumption allows the accountant to add the cost of a parcel of land purchased in 2013 to the cost of land purchased in 1956. for example, if two acre parcel cost the company 20,000 in 1956 and in 1023 a two acre parceladjacent to the original parcel is ourchased for a cost of 800000 the accountant will add the 800000 ti the land account and will report the land aoounts balance of 820000 on the companys balance sheet. to say that the purchasing power of the dollar has not changed from 1956 to 2013 is quite stretch however, the assumption is that the purchasing power of the dollar has not changed.

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

3) Purchasing power parity and the exchange rate in the long run (how exchange rate is

To avoid spurious results, unit root tests using Augmented Dickey-Fuller (ADF) (Dickey and Fuller, 1981) and Philips-Perron (PP) are performed to determine the time-series properties of the variables employed in the analysis. Two or more variables are said to be co-integrated when they exhibit long run equilibrium (relationship) if they share common trend(s).Therefore Auto-regressive distributed lag bounds approach (ARDL) is used to test it. The choice is based on several

One important determinant of a country 's exchange rate in the long term is whether it has a higher or lower inflation rate than its trading partners. The theory of purchasing power parity (PPP) suggests that the exchange rate between two countries will adjust to ensure that purchasing power is equalised in both countries. If a country 's inflation rate is persistently higher than that its trading partners, its trade-weighted exchange rate will tend to depreciate to prevent a progressive loss of competitiveness over time. In addition, political events can also impact the exchange rate, as seen with the ‘Malcolm Turnbull effect’ which lifted the Australian dollar. The Australian dollar, at US70.68c broke US71c in overnight trade after Turnbull discussed the need for economic reforms to counteract "challenges" facing the slowing local economy. Shortly after Mr Turnbull was confirmed as the victor against Prime Minister Tony Abbott, the dollar additionally rose one-third of a cent.

The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time

This paper aims to compare the Japanese Yen against the US Dollar over a five year period starting from 2005 till 2010. The exchange traded fund for Japanese Yen shall also be discussed in the paper and afterwards an analysis of both the currencies shall be presented. There are different factors that influence the exchange rate differences between any two chosen currencies. The effects produced by these different exchange rates can be of quite different intensity. The most common elements that have an impact on exchange rate difference include economic factors, socio political factors and other behavioral or technical factors also. The macroeconomic factors such as growth of a country, employment rate, gross domestic product etc. All

Considering the following regression model: BRi=β0++β1(Y)+β2(Z)+ui which connects the bank rate (BR) of Canada to foreign exchange rates(Y) and CPI(Z). In this model X1 and X2 are the corresponding independent variables exchange rates and CPI measured in decimals. There were three estimation methods that were used to estimate the model: The Durbin Watson test is used to test the presence of autocorrelation. The residual values from the regression analysis helps determine if there is a relationship between values that are lagged. The result of the Durbin Watson test lies between 0 and 4 and depending on the value it will show the presence or absence of autocorrelation. The value that is closer to 0 indicates that there is positive autocorrelation, 2 indicates that there is no autocorrelation and values approaching 4 indicate that there is negative autocorrelation. For the hypothesis testing I’ve used the F-Statistic testing, in the later section of the paper I will explain my findings and the results.

4.14 On January 1, 1994, the annual inflation rates in the U.S. and Italy were expected to be 4% and 7%, respectively. If the current spot rate on that day was $1 = L2,000, then the expected spot rate for the lira in three years was

2. The money-measurement assumption which assumes that purchasing power of rupee is stable is a major limitation of the cost concept.

Due to the fact that short-term nominal price rigidities, the movements of nominal exchange rate result in movements of real exchanger rate in the short-run. Balassa- Samuelson model is the first and most popular model for rationalizing the existence long-run deviations from PPP, which depends upon the assumption that the equilibrium exchange rate is determined by the traded good prices. The underlying argument of this model is that, both developed countries (DC) and less developed countries (LDC) produces traded and non-traded goods, labour mobility implies that wages should be equalized between these two sectors. They argue that the price levels in DC tend to be higher than LDC when all countries’ price levels converted to dollars at nominal exchange rate, which dues to the fact that DC have higher absolute productivity levels compared with LDC, also because DC are relatively more productive in the traded goods sector, while productivity levels are similar in their respective non-traded goods sector (Balassa, 1964, cited in Hallwood and Macnonald, 2000).

David Ricardo came up with the theory of Purchasing Power Parity (PPP). PPP is an economic technique used to estimate the level of adjustment needed to arrive at an agreed exchange rate between two currencies in order that trade can effectively take place. When the price of two commodities from two different countries is converted into one currency, the price of both commodities should be the same. One way of determining the inter-currency exchange rates is to carry out a PPP test. This test will also help to prevent commodity traders from buying cheaply and selling at significantly higher rates.

Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.