PURCHASING POWER UPDATE

To see why the peso price is divided by the exchange rate rather than multiplied, notice the conversion of units shown in the brackets. The dollar price of videos sold in Mexico can be calculated by dividing the video price in pesos by the spot exchange rate as shown: P p v E p/$ = 150 10 = $15/video. Price of videos in Mexican market ( P p v) To explain the theory it is best to first review the idea behind the law of one price. PPP theory is based on an extension and variation of the вЂњlaw of one priceвЂќ as applied to the aggregate economy. This is in contrast with the interest rate parity theory, which assumes that the actions of investors (whose transactions are recorded on the capital account) induce changes in the exchange rate. In another vein, PPP suggests that transactions on a countryвЂ™s current account affect the value of the exchange rate on the foreign exchange (Forex) market. The theory assumes that the actions of importers and exporters (motivated by cross-country price differences) induce changes in the spot exchange rate. is a theory of exchange rate determination and a way to compare the average costs of goods and services between countries. Purchasing power parity (PPP) A theory of exchange rate determination based on tradersвЂ™ motivations that result in a PPP exchange rate when there are no transportation costs and no differential taxes applied. Identify the conditions under which purchasing power parity holds.Identify the conditions under which the law of one price holds.

PURCHASING POWER UPDATE

What are your takes about the purchasing power of the general public in your country? Update us in the comments below. So, what are your thoughts about the importance of purchasing power? Hence, the purchasing power, to some extent, can be defined as the power over other people, to the extent that they are willing to trade their labor or goods for moneyВ orВ currency. The purchasing power is an essential and straightforward method to discern the value of money and set economic policies like budgets.ДЄ great economist Adam Smith once quoted that having money gives one the ability to command othersвЂ™В labour. вЂњIncreased wages, higher pensions, and more unemployment insurance, all are of no avail if the purchasing power of money falls faster.вЂќ While addressing the importance of purchasing power, Bernard Mannes Baruch, an American financier, stock investor, philanthropist, statesman, and political consultant says. Purchasing power is an indicator of the present-day economic and market conditions. Whenever there is an unfavorable change in the purchasing power that does no good for the national economy, the government comes up with rules and regulations which curb this economic imbalance and remove financial disparity. It is a regular pattern that the customers lose purchasing power when the prices increase, and they gain it back when the costs decrease. Purchasing power, as mentioned above, is the power to buy goods and services in one unit of money. Effects of Increase and Decrease in Purchasing Power

Now, all the countries aim to keep the rate of inflation only at 2% not to cause any undesirable and radical changes in the purchasing power of the citizens. The European Central Bank (ECB) also pursued this вЂquantitative easingвЂ™ and the European Economic, and Monetary Union has applied strict rules on financial policies. Once the situation eased out, these regulations were terminated. Through this, it bought the government and other market securities at a much lower interest rate which was near to zero to decrease inflation and increase the money supply and purchasing power. To ease this out, the US Federal Reserve came up with a policy called вЂquantitative easingвЂ™. In the same year, 2008, the US also faced such a situation.