Discussion Replies
1– Omar, thanks for your contribution to this week’s discussion; your assessments are correct. According to Salvatore (2012), monetary models can increase the nation’s money supply leading to a proportionate increase in prices and depreciation of the nation’s currency in the long run, as postulated by the PPP theory. This means that the nation’s currency’s nominal and real exchange rates can move together by the same percentage over time. Salvatore (2012) also believes that empirical tests do not support the monetary model of exchange rates. One reason for this is that the monetary approach does not include all the factors that affect the exchange rate.
Salvatore (2012) also argued that the asset or portfolio model could increase a nation’s money supply, leading to an immediate decline in the nation’s interest rate and a shift from domestic bonds to domestic currency and foreign bonds. Domestic to foreign bonds’ shift causes an immediate depreciation of the home currency as individuals and firms exchange domestic for foreign currency to purchase more foreign bonds. Assets or portfolio models of exchange rates differ from the monetary model by postulating that the exchange rate is determined by equilibrating or balancing the stock or total demand and supply of financial assets (i.e., money is only one, as in the monetary approach) in each country. Based on your assessments of this week’s discussion, is the monetary approach better than the asset or the portfolio model?
Reference
Salvatore, D. (2012). Introduction to International Economics. 3rd edition. John Wiley & Sons, Inc.
2–Hi Class,
The purchasing-power parity (PPP) theory goes back in time to the Swedish economist Gustav Cassel in order to estimate the equilibrium exchange rates where countries could trade to the gold in relationship with commodity prices in the several nations during World War I. To be more specific, the absolute purchasing-power parity theory suggests that the equilibrium exchange rate between two currencies is equal to the ratio of the price levels in the two nations. For instance, if the price of one pound of potatoes is $1 in the United States and £1 in England, then the exchange rate between the dollar and the British pound should be R = $1/£1 = 1. This is, according to the law of one price, a specified commodity should have the same price. On the other hand, a more advanced relative purchasing-power parity theory suggests that the change in the exchange rate over a period of time should be proportional to the relative change in the price levels in the two nations over the same time period. For instance, if the general price level does not change in the foreign nation from the base period to period 1, while the general price level in the home nation increases by 50 percent, the relative PPP theory postulates that the exchange rate should be 50 percent higher (i.e., the home nation’s currency should depreciate by 50 percent) in period 1 as compared with the base period (Salvatore,2013). In my opinion, exchange rates have their own pros and cons when it comes to buying or selling abroad. Sometimes it helps to have a currency that appreciates like the US dollar, people and businesses can import goods and services to the US. However, it is expensive to other countries to buy products that are priced in US dollars and their currencies depreciates like NIO Cordobas. For example, The NIO Cordoba depreciates 5% annually in Nicaragua, so in a year times it will cost 5% more to buy the same product from the same supplier. Those 5% depreciation should be accounted on my costs to leverage.
Reference
Salvatore, D. (2013). In International economics (pp. 464–465). essay, John Wiley & Sons
3–Hello Class!
One popular macroeconomic analysis metric to analyze economic efficiency and ways of life between nations is similar ratesower parity (PPP). PPP is a financial hypothesis of conversion scale assurance. It expresses that the value levels between two nations ought to be equivalent(Iyke & Odhiambo,2017). As indicated by this idea, two monetary forms are in balance known as the monetary forms being at standard when a container of products is estimated the equivalent in the two nations, considering the trade rates. PPP takes into consideration financial experts to think about monetary profitability and ways of life between nations. A few nations alter their GDP figures to reflect PPP. This implies products in every nation will cost the equivalent once the monetary standards have been traded.
Relative Purchasing Power Parity (RPPP) is an extension of the customary PPP theory to remember changes for expansion after some time. Buying influence is the influence of cash communicated by the quantity of products or administrations that one unit can purchase, and which can be decreased by inflation. RPPP proposes that nations with higher paces of expansion will have a cheapened money (Alessandria & Kaboski, 2011). As indicated by relative buying power equality RPPP, the distinction between the two nations’ paces of expansion and the expense of wares will drive changes in the swapping scale between the two nations. RPPP develops buying power equality and supplements the hypothesis of absolute purchasing power parity (APPP). The APPP idea announces that the swapping scale between the two countries will be equivalent to the proportion of the value levels for those two nations. S=P1/P2
APPP is the fundamental PPP hypothesis, which expresses that once two monetary standards have been traded, a bushel of products ought to have a similar worth. Generally, the hypothesis depends on changing over other world monetary standards into the US dollar (Alessandria & Kaboski, 2011). In the event that this doesn’t remain constant, at that point APPP recommends that the cash swapping scale will change after some time until the products are of equivalent worth as with no obstructions to exchange, there ought to be a balance in the cost of merchandise. This is a totally value level hypothesis, which just glances at precisely the same bushel of products in every nation, with no different components included.
Reference:
Alessandria, G., & Kaboski, J. P. (2011). Pricing-to-market and the failure of absolute PPP. American Economic Journal.Macroeconomics, 3(1), 91-127. doi:http://dx.doi.org/10.1257/mac.3.1.91
Iyke, B. N., & Odhiambo, N. M. (2017). Foreign exchange markets and the purchasing power parity theory. African Journal of Economic and Management Studies, 8(1), 89-102. doi:http://dx.doi.org/10.1108/AJEMS-03-2017-147
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