International-Financial-Management---Bekaert-2e---Solutions---Ch08Word格式.doc

International-Financial-Management---Bekaert-2e---Solutions---Ch08Word格式.doc

《International-Financial-Management---Bekaert-2e---Solutions---Ch08Word格式.doc》由会员分享，可在线阅读，更多相关《International-Financial-Management---Bekaert-2e---Solutions---Ch08Word格式.doc（9页珍藏版）》请在冰点文库上搜索。

PurchasingPowerParityandRealExchangeRates

QUESTIONS

1.Whatdoesthepurchasingpowerofamoneymean?

Howcanitbemeasured?

Answer:

Thepurchasingpowerofamoneyisalsoknownasitsrealvalueandindicatestheamountofgoodsandservicesthatcanbepurchasedwithagivenamountofthemoney.Wemeasurepurchasingpowerbyfirstcalculatingthepricelevel,whichisaweightedaverageofthepricesofthegoodsandservicesthatpeopleconsume.Theweightsinthepricelevelreflectthesharesofthesegoodsandservicesintheconsumptionbundleofatypicalindividual.Thepurchasingpowerofthemoneyisthenfoundbytakingthereciprocalofthepricelevel.Theunitsofthepricelevelareanamountofmoneyperconsumptionbundle,andtheunitsofpurchasingpowerareconsumptionbundlesperunitofmoney.

2.Supposethegovernmentreleasesinformationthatcausespeopletoexpectthatthepurchasingpowerofamoneyinthefuturewillbelessthantheypreviouslyhadexpected.Whatwillhappentotheexchangeratetoday?

Why?

Typically,whenpeoplethinkthatthepurchasingpowerofamoneyisgoingtodeclineinthefuture,duetohigherexpectedinflation,theytrytosellthatcurrencytodaytogetintoacurrencythatwillhavemorestablepurchasingpower.Thisreduceddemandforthecurrencycausesthatcurrencytoweakenordepreciateimmediately.

3.Whatisthedifferencebetweenapricelevelandapriceindex?

Thepricelevelisaweightedaverageofthepricesofthegoodsandservicesthatpeopleconsume.Thepriceindexisaratioofapricelevelatonepointintimetothepricelevelinsomebaseyear,withtheratiousuallymultipliedby100.Thus,ifthepricelevelinagivenyearis30%higherthanthepricelevelinthebaseyear,thepriceindexwouldbe130.Pricelevelsgiveyouinformationaboutthepurchasingpowerofacurrency.Priceindexesgiveyouinformationabouttherateofinflationbetweentwopointsintime.

4.Whatdoeconomistsmeanbythelawofoneprice?

Whymightthelawofonepricebeviolated?

Thelawofonepricesaysthatthepriceofagood,whendenominatedinaparticularcurrency,isthesamewhereverintheworldthegoodisbeingsold.Thelawofonepricereliesonarbitrageinthegoodsmarket.Ifthegoodisbeingsoldinoneplaceatalowpriceandisbeingsoldinadifferentplaceatahighprice,peoplehaveanincentivetoarbitragethetwomarkets.Therefore,anythingthatmakesitdifficultorcostlytoarbitrageinthegoodsmarketcancreateadeviationfromthelawofoneprice.Clearly,transactioncosts,suchasthecostsofshipping,generatedeviationsfromthelawofonepricethatcannotbearbitraged.Tariffsandquotasonimportsandexportsalsocreatedeviations.Ifmarketsarenotcompetitiveandfirmshavesomemonopolypower,thecorporationmaydecidetochargedifferentpricesindifferentcountries,butitmustbeabletosegmentthemarketstopreventarbitrage.Ifarbitragecannotbedoneinstantaneously,therewillbeaspeculativeelementthatentersthecalculationsandthespeculatormayhavetobecompensatedfortheriskoflosswithanexpectedprofitfrombuyinginonemarketandsellinginanothermarketatalaterpointintime.Finally,variousgoodsmarketsaresubjecttoacertainamountofpricestickinessbecauseofthecostsofchangingprices.Becauseexchangeratesareassetpricesandfreelyflexible,unanticipatedchangesinexchangerateswillcreatedeviationsfromthelawofonepriceifgoodspricesaresticky.

5.WhatisthevalueoftheexchangeratethatsatisfiesabsolutePPP?

Absolutepurchasingpowerparityrequiresthattheinternalpurchasingpowerofacurrencyequalsitsexternalpurchasingpower.Theinternalpurchasingpoweriscalculatedbytakingthereciprocalofthepricelevel,andtheexternalpurchasingpoweriscalculatedbyfirstexchangingthedomesticmoneyintotheforeignmoneyintheforeignexchangemarketandthencalculatingthepurchasingpowerofthatamountofforeigncurrencyintheforeigncountry.Hence,thepredictionofabsolutePPPfortheexchangerateofdomesticcurrencyperunitofforeigncurrencyisfoundbyequatingtheinternalpurchasingpowerofthedomesticcurrencytotheexternalpurchasingpowerofthedomesticcurrency:

whereP（DC）isthedomesticpricelevel,P（FC）istheforeignpricelevel,andSPPPsignifiestheexchangerateofdomesticcurrencyperunitofforeigncurrencythatsatisfiesthePPPrelation.BysolvingforSPPP,wefind

6.IftheactualexchangeratefortheeurovalueoftheBritishpoundislessthantheexchangeratethatwouldsatisfyabsolutePPP,whichofthecurrenciesisovervaluedandwhichisundervalued?

Theterminologyof“overvalued”and“undervalued”referstotherelationshipoftheexchangeratetothePPPtheory.IftheactualexchangerateofeurosperpoundislessthanthePPPprediction,theeuroisovervaluedandthepoundisundervalued.WeknowthisisthecorrectanswerbecauseiftheactualexchangerateweretomovetothePPPprediction,theeurowouldhavetoweaken,andthepoundwouldcorrespondinglyhavetostrengthen,ontheforeignexchangemarket.Theweakeningoftheeurowouldcorrectitsovervaluation,andthestrengtheningofthepoundwouldcorrectitsundervaluation.

7.Whatmarketforcespreventabsolutepurchasingpowerparityfromholdinginrealeconomies?

Whichoftheserepresentunexploitedprofitopportunities?

AnyoftheforcesthatcreateadeviationfromthelawofonepricecanalsocauseadeviationfromPPP.Seetheanswertoquestion4.Inaddition,evenifthelawofonepriceweresatisfiedforallgoods,iftheconsumptionbundlesinthetwocountriesputdifferentweightsonthegoodsbecauseoftastedifferencesacrosscountries,relativepricechangeswouldbereflectedindeviationsfromPPP.ItisouropinionthatdeviationsfromPPPdonotrepresentunexploitedprofitopportunities.

8.WhyisitbettertouseaPPPexchangeratetocompareincomesacrosscountriesthananactualexchangerate?

Whencomparingincomesacrosscountries,oneisinterestedincomparingthequalityoflifethatoccursfromearningsuchincomesandconsuminginthosecountries.Onewaytodosuchacomparisonistoexaminetherealvaluesofthenominalincomes,thatis,tomultiplyeachofthenominalincomestimestherespectivepurchasingpowersofthecurrencies（whichisequivalenttodividingthenominalincomebythepricelevel）.Therealvalueoftheincometellsyouthecommandovergoodsandservicesthatthenominalincomeprovideswhenyouconsumeinthatcountry.IftherealincomesincountriesAandBwerethesame,wewouldhave

IfwemultiplythisexpressionbythepricelevelincountryA,weget

Intheaboveexpression,theratioofthepricelevelincountryAtothepricelevelincountryBisthepurchasingpowerparityexchangerate.Hence,ifwemultiplythenominalincomeincountryBbythepurchasingpowerparityexchangeratewegetanominalincomethatisintheunitsofthecurrencyofcountryAandthatcanbecomparedtothenominalincomeincountryA.IfthenominalincomeincountryAishigherthanthepurchasingpowerexchangeratemultipliedbynominalincomeincountryB,peopleincountryAarebetteroffintermsoftheirabilitytoconsumethanthoseincountryB.

IfyouusetheactualexchangerateratherthanthePPPexchangeratetoconvertthenominalincomeincountryBintocurrencyofcountryA,youareeffectivelysayingyouwouldliketoearntheincomeincountryB,butyouwanttoconsumeitincountryA.Thiscancreateincorrectinferencesaboutwhereisthebestplacetolive.SupposecurrencyBisovervaluedrelativetoPPP.Then,themarketexchangerateofcurrencyAperunitofcurrencyB,denotedS,isgreaterthanthePPPprediction,

SPPP=

ThatisS>

SPPP.Insuchasituation,itcanhappenthat

inwhichcaseweknowfromtheabovediscussionthatwewouldprefertoearnincomeincountryAandconsumethere.Yet,whenwecompareincomeswiththeactualexchangerate,wemightfindthatthe

TheovervaluationofcurrencyBcausesustothinkthattheincomeincountryBispreferred.But,thisisonlycorrectifweearntheincomeincountryBbutconsumeincountryAafterconvertingourincomeintothecurrencyofcountryA.

9.WhatisrelativePPP,andwhydoesitrepresentaweakerrelationshipbetweenexchangeratesandpricesthanabsolutePPP?

ThetheoryofrelativePPPspecifiesthatexchangeratesadjustinresponsetodifferencesininflationratesacrosscountriestoleavethedeviationoftheactualexchangeratefromabsolutePPPunchanged.Intuitively,inflationistherateoflossoftheinternalpurchasingpowerofacurrency.Thus,iftwocurrenciesarelosinginternalpurchasingpoweratdifferentratesbecausetheratesofinflationinthetwocountriesarenotequal,therateofchangeoftheexchangeratecanoffsetthedifferentialratesofinflationtoleavethesameabsoluterelationshipbetweentheinternalandexternalpurchasingpowersofthecurrencies.TherelativePPPtheoryisweakerthanabsolutePPPbecauserelativePPPcouldbesatisfiedeventhoughtherearedeviationsfromabsolutePPP.TherequirementforrelativePPPtoholdisthatthedeviationsfromabsolutePPPdonotchangeovertime.

10.Whatistherealexchangerate,andhowarefluctuationsintherealexchangeraterelatedtodeviationsfromabsolutePPP?

Therealexchangerate,say,ofthedollarrelativetotheeuro,isdenotedRS（