PROBLEMS AND APPLICATIONS

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PROBLEMS AND APPLICATIONS .l How would me the flowing transactions affect U.S. exports, imports, and net exports? a, American art professor spends the summer touring museums in Europe. b, Students in Paris flock to see the latest movie from Hollywood. c, Your uncle buys a new Volvo. 2.Would each of the following transactions be included […]

A FIRST THEORY OF EXCHANGE RATE DETERMINATION: PURCHASING-POWER PARITY

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A FIRST THEORY OF EXCHANGE RATE DETERMINATION: PURCHASING-POWER PARITY The purpose of this chapter has been to develop some basic concepts that macro-economists use to study open economies. You should now understand how a nation’s trade balance is related to the international flow of capital and how national saving can differ from domestic investment in an open […]

CASE STUDY

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CASE STUDY THE HAMBURGER STANDARD The second reason that purchasing-power parity does not always hold is that even tradable goods are not always perfect substitutes when they are produced in different countries. For example, some consumers prefer German cars, and others prefer American cars. Moreover, consumer tastes can change over time. If German cars suddenly become more popular, […]

LIMITATIONS OF PURCHASING POWER PARITY

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LIMITATIONS OF PURCHASING POWER PARITY Purchasing-power parity provides a simple model of how exchange rates are determined. For understanding many economic phenomena, the theory works well. In particular, it can explain many long term trends, such as the depreciation of the U.S. dollar against the German mark and the appreciation of the U.S. dollar against the Italian lira. […]

In The News

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In The News The Starbucks Index A new application of purchasing-power parity IS percolation through foreign in market. Burgers or Beans? Should move: towards levels that equalize the prices of a basket of goods and services in different countries= dollar should buy the same everywhere. By coincidence, the average price of a Starbucks tall latte in America […]

CASE STUDY

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CASE STUDY THE NOMINAL EXCHANGE RATE DURING A HYPERINFLATION Macro economists can only rarely conduct controlled experiments. Most often, they must glean what they can from the naturaleriments that history gives them. One natural experiment is hyperinflation-the high inflation that arises when a government turns to the printing press to pay for large amounts of government spending. Because […]

IMPLICATIONS OF PURCHASING POWER PARITY

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IMPLICATIONS OF PURCHASING POWER PARITY What does the theory of purchasing-power parity say about exchange rates? It tells us that the nominal exchange rate between the currencies of two countries depends on the price levels in those countries. If a dollar buys the same quantity of goods in the United States (where prices are measured in dollars) […]

THE BASIC LOGIC OF PURCHASiNG-POWER PARITY

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THE BASIC LOGIC OF Purchasing POWER PARITY The theory of purchasing-power parity is based on a principle called the law of one price. This law asserts that a good must sell for the same price in all locations. Otherwise, there would be opportunities for profit left unexploited. For example, suppose that coffee beans sold for less in Seattle than […]