PPP

Question 1

Two problems of using exchange rates?

Answer 1

Exchange rates can be volatile and work only well with tradable products.

Question 2

What does PPP stand for?

Answer 2

Purchasing Power Parity

Question 3

What is Purchasing Power Parity

Answer 3

Way of trying to recognize the difference in living costs in different countries

Question 4

What does PPP do in economic theory

Answer 4

Compares prices in different countries through a basket of goods.

Question 5

What’s overvalued currency

Answer 5

Where prices are greater than its innate value.

Question 6

What’s undervalued currency?

Answer 6

Where prices are less than its innate value.

Question 7

Principle of Currency Equalization

Answer 7

Over the long run , currencies should equalize in value with each other

Question 8

Equation of PPP

Answer 8

S (exchange rate) =P1 (costs in currency 1)/P2 (costs in currency 2)

Question 9

Reason why currency remain overvalue for so long? (2 reasons)

Answer 9

1. Tariffs 2. Transportation Costs.

Question 10

Problems of making international comparisons across countries (List 2)

Answer 10

Quality of products might be different. Nations do not have sophisticated methods to collect data (quality suffers)