购买力平价

• Exchange rate movements induced by changes in relative prices between traded and non- traded goods. • However, exchange rate movements are induced by other factors: • Differing rates of productivity in the traded and non- traded sectors. • Problems measuring PPP: • National price indices attach different weights to different types of goods • Base period for test (month/quarter/year)
• Bela Balassa • Paul Samuelson (1964) • Lower price of goods in the non- traded sector in developing countries is mainly due to lower labour productivity in the traded goods sector compared to developed countries • Assumption: equal wages between traded and non traded sectors within each economy • Wages: positively related to labour productivity • Prices: determined positively by wages and inversely by productivity (both, labour and capital, although only labour productivity is consideded)
• • • •
Law of one price: Assumptions: presence of a competitive market structure Absence of transport costs and other trade barriers • Law of one price: “identical products which are sold in different markets will sell at the same price in terms of a common currency”
• Generalised version of PPP: • Distinction between traded and non- traded goods • Non- traded goods: cannot be traded internationally • Traded goods: can be traded internationally in highly competitive markets • PPP: mor likely to hold in the case of traded goods. • Price of traded goods will keep in line with international competition
• Price of non- traded goods: determined by domestic supply and demand. • Assumption: PPP holds for traded goods • PT=SPT* • PI= aggregate price index of the domestic economy made up of a weighted average of the prices of traded and non- traded goods. • PI= αPN + (1-α) PT • α= proportion of non- traded goods in the domestic price index
• Absolute PPP: • S=P/P* • Rise in p leads to a proportional depreciation of S (£/$) • Relative PPP: • Since the absolute PPP is unlikely to hold, there’s a relative version that allows thee presence of distortions in the market: • %∆S=%∆P-%∆P*
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Summary of empirical evidence
• Frenkel (1981) • PPP performs better for countries with geographic proximity and strong links. • Exchange rates are more volatile than national price levels: Vs PPP hypothesis • PPP holds better in the long run than in the short run • 1980: countries with very high inflation rates experienced rapid exchange rate depreciations: PPP: dominant force in determining exchange rates • PPP holds better for traded goods than for nontraded goods • • • • • • • • • Problems facing the PPP: Different baskets Different quality of goods consumed Transport costs and trade barriers Imperfect competition. Example: Price discrimination practices by multinational companies Differences between capital and good markets: goods markets: sticky prices capital markets: highly integrated Productivity differentials
Balassa- Samuelson model
• Overall higher price level in rich countries : • Prices of non traded goods are higher in developed than in developing countries.
• Balassa- Samuelson model: explanation of why rich countries tend to have overall high price indices and poor countries low price indicies when baskets are converted into a common currency. • PPP based on tradable goods alone: will undervalue the purchasing power and living standards of people in poor countries because they can buy more non- traded goods per dollar than people in rich countries.
• Deviations from PPP: • Theory relies too heavily on goods arbitrage: no role for international capital movements , which have grown since WW2 • Capital movements are influenced by expectations • Next: theories that try to explain those capital movements. • However, • PPP does play a role in exchange rate determination, especially in the long run.
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Equation 6.6
• For the rest of the world: • PI *= β PN * + (1- β) PT * • β = proportion of non- traded goods in the rest of the world’s price index
Equation 6.7
Purchasing Power Parity
(PPP)
• Gustav Cassel (1970’s) • David Ricardo * The High Price of Bullion, a Proof of the Depreciation of Bank Notes (1810) • Azpilcueta Navarro (1556) Comentario Resolutorio de Cambios
பைடு நூலகம்
• Low wages in developing countries are due to low productivity in the traded goods sector • This leads to a relatively low price for nontraded goods even if productivity in the nontraded sector is equal for developed and developing countries. • High productivity in rich countries’ tradable sector leads to high wages in its non- tradable sector.