Wednesday, January 12, 2011

Blog #2

Purchasing Power Parity (PPP)
1. International companies or anyone trading internationally would be interested in this because it determines how much a given good is worth in two different countries, with the exchange rate included.
2. These statistics are collected by Organization of Economics Cooperation and Development (OECD) among other groups each year. For example, the magazine The Economist comes out with a "Hamburger Index" each year comparing the price of a McDonald's hamburger around the world. These statistics aren't always the most accurate because consumers across different countries prefer different goods and services, which make it hard to collect data. Exchange rates between countries are used to measure if some goods are overvalued or undervalued in the countries.
3. We can use PPP to determine the location to buy a particular good. For instance, one USD is currently worth 1.3 EUR, meaning that if a good cost $100 in the United States, that same good should cost $130 USD in Europe because of the exchange rate. If the good cost only $110 in Europe, then customers in the United States will want to buy that good from Europe because it is cheaper in Europe relatively to the price in the U.S. With more U.S. customers selling USD and buying EUR, the EUR will start to appreciate against the USD, causing the cost of the good in Europe to eventually be relatively the same price as the good in the U.S. The exchange rate plays a key role in PPP and it's constantly changing.
-Andrew Manor

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