ABSOLUTE PPP RELATIVE PPP computation
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Catégorie :Category: nCreator TI-Nspire
Auteur Author: SPITZER2001
Type : Classeur 3.0.1
Page(s) : 1
Taille Size: 2.62 Ko KB
Mis en ligne Uploaded: 20/02/2025 - 05:58:00
Uploadeur Uploader: SPITZER2001 (Profil)
Téléchargements Downloads: 10
Visibilité Visibility: Archive publique
Shortlink : https://tipla.net/a4512194
Type : Classeur 3.0.1
Page(s) : 1
Taille Size: 2.62 Ko KB
Mis en ligne Uploaded: 20/02/2025 - 05:58:00
Uploadeur Uploader: SPITZER2001 (Profil)
Téléchargements Downloads: 10
Visibilité Visibility: Archive publique
Shortlink : https://tipla.net/a4512194
Description
Fichier Nspire généré sur TI-Planet.org.
Compatible OS 3.0 et ultérieurs.
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Difference Between Absolute PPP and Relative PPP Purchasing Power Parity (PPP) is an economic theory that compares price levels between two countries. It helps to understand how exchange rates should adjust to keep the cost of goods the same across countries. There are two main types of PPP: 1. Absolute PPP Compares price levels directly. 2. Relative PPP Compares changes in price levels over time (i.e., inflation rates). ________________________________________ 1. Absolute Purchasing Power Parity (Absolute PPP) Definition: " Absolute PPP states that the price of an identical basket of goods should be the same in two countries when measured in a common currency. " It focuses on the level of prices rather than changes in prices. Formula: E=P/P " E = Nominal Exchange Rate (Domestic currency per unit of foreign currency) " P = Price level of the domestic basket " P* = Price level of the foreign basket ________________________________________ Example: " A basket of goods costs: o 100 USD in the U.S. o 2000 JPY in Japan " According to Absolute PPP: E=P/P=100/2000=0.05E " The exchange rate should be 0.05 USD per JPY or 20 JPY per USD. " If the actual exchange rate is different, one currency is either overvalued or undervalued. ________________________________________ Key Points of Absolute PPP: " Assumes no transportation costs, tariffs, or trade barriers. " Assumes identical goods and services in both countries. " Rarely holds in reality due to differences in consumption patterns, taxes, and trade restrictions. ________________________________________ 2. Relative Purchasing Power Parity (Relative PPP) Definition: " Relative PPP looks at the changes in price levels (inflation rates) over time between two countries. " It states that the exchange rate will change by the same percentage as the difference in inflation rates. " This adjusts for changes in purchasing power rather than absolute price levels. Formula: E1/E0=(1+À)/(1+À) " E = Initial exchange rate " E = New exchange rate " À = Inflation rate in the domestic country " À* = Inflation rate in the foreign country Or alternatively: E=ÀÀ " E = Percentage change in the exchange rate ________________________________________ Example: " Initial Exchange Rate (E) = 1.20 USD per EUR " Inflation in the U.S. (À) = 3% " Inflation in the Eurozone (À*) = 1% " According to Relative PPP: E1/1.20 =( 1+0.03)/(1+0.01) E1 = 1.20×(1.03/1.01)=1.22E " The new exchange rate should be 1.22 USD per EUR. " The USD depreciates against the EUR because inflation is higher in the U.S. than in the Eurozone. ________________________________________ Key Points of Relative PPP: " Focuses on inflation rate differences rather than absolute price levels. " Predicts how exchange rates should move over time. " More realistic than Absolute PPP because it accounts for inflation and is less affected by market imperfections. Made with nCreator - tiplanet.org
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Compatible OS 3.0 et ultérieurs.
<<
Difference Between Absolute PPP and Relative PPP Purchasing Power Parity (PPP) is an economic theory that compares price levels between two countries. It helps to understand how exchange rates should adjust to keep the cost of goods the same across countries. There are two main types of PPP: 1. Absolute PPP Compares price levels directly. 2. Relative PPP Compares changes in price levels over time (i.e., inflation rates). ________________________________________ 1. Absolute Purchasing Power Parity (Absolute PPP) Definition: " Absolute PPP states that the price of an identical basket of goods should be the same in two countries when measured in a common currency. " It focuses on the level of prices rather than changes in prices. Formula: E=P/P " E = Nominal Exchange Rate (Domestic currency per unit of foreign currency) " P = Price level of the domestic basket " P* = Price level of the foreign basket ________________________________________ Example: " A basket of goods costs: o 100 USD in the U.S. o 2000 JPY in Japan " According to Absolute PPP: E=P/P=100/2000=0.05E " The exchange rate should be 0.05 USD per JPY or 20 JPY per USD. " If the actual exchange rate is different, one currency is either overvalued or undervalued. ________________________________________ Key Points of Absolute PPP: " Assumes no transportation costs, tariffs, or trade barriers. " Assumes identical goods and services in both countries. " Rarely holds in reality due to differences in consumption patterns, taxes, and trade restrictions. ________________________________________ 2. Relative Purchasing Power Parity (Relative PPP) Definition: " Relative PPP looks at the changes in price levels (inflation rates) over time between two countries. " It states that the exchange rate will change by the same percentage as the difference in inflation rates. " This adjusts for changes in purchasing power rather than absolute price levels. Formula: E1/E0=(1+À)/(1+À) " E = Initial exchange rate " E = New exchange rate " À = Inflation rate in the domestic country " À* = Inflation rate in the foreign country Or alternatively: E=ÀÀ " E = Percentage change in the exchange rate ________________________________________ Example: " Initial Exchange Rate (E) = 1.20 USD per EUR " Inflation in the U.S. (À) = 3% " Inflation in the Eurozone (À*) = 1% " According to Relative PPP: E1/1.20 =( 1+0.03)/(1+0.01) E1 = 1.20×(1.03/1.01)=1.22E " The new exchange rate should be 1.22 USD per EUR. " The USD depreciates against the EUR because inflation is higher in the U.S. than in the Eurozone. ________________________________________ Key Points of Relative PPP: " Focuses on inflation rate differences rather than absolute price levels. " Predicts how exchange rates should move over time. " More realistic than Absolute PPP because it accounts for inflation and is less affected by market imperfections. Made with nCreator - tiplanet.org
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