XRs And XR Savings 4 Flashcards
Problems with using the XR to measure GDP
- XR rates can be volatile month to month
- XRs are more relevant to products that are traded between countries rather than non-trades products
What do calculations of GDP based on market XRs often do
Overestimate the cost of living in poorer developing countries
What is the Balassa-Samuelson effect
When GDP based on market XRs tend to over-estimate the cost of living in poorer developing countries
How can we make a PPP adjustment for comparing GDP
We build a basket of goods and services and how these prices change
What is PPP
The exchange rate needed to buy e.g. €100 to buy the same quantity of products in each country
What is the Big Mac index a way of
Measuring PPP between different countries
What may the PPP not accurately reflect
- differences in the quality of g/s
- consumption weights
- informal sector
- doesn’t take into account transaction costs of converting currency
When does an optimal currency occur best
With highly integrated countries
