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Int Fin > PPP > Flashcards

PPP Flashcards

1
Q

Law of one price

A

All other costs zero, the prices of the same goods are equal when converted to the same currency:
P_us=ExP_eu

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2
Q

PPP theory

A

Basket version of one price

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3
Q

Relative PPP

A

E_t-E_t-1/E_t-1=inf_us-inf_eu

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4
Q

Fisher equation

A

R_$-R_£=inf_us-inf_eu (expected)

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5
Q

Problems of PPP

A
  1. SR: not valid, LR: valid
  2. Transport costs
  3. Tariffs
  4. Taxes
  5. Non-tradables
  6. Market imbalances
  7. Different baskets
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Int Fin (6 decks)

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