Law of One Price
The same good must sell for the same price in different markets
What is the law of one price?
The application of the law of one price across countries for a basket of goods and services
What is purchasing power parity?
The rate that equalizes the cost of a market basket of goods between two countries
What is the purchasing power parity exchange rate?
The predicted inflation rate in Russia when the exchange rate of the ruble to the yuan was 1₽ / 19¥ one year ago and today it is 1₽ / 20¥, and inflation in China over the past year was 8%
What is 13%?
Created by the Economist in the late 1980s
What is the Big Mac index?
The price of a single good in country A decreases because the price of the same good in country B is significantly lower
What is weak demand and increased supply?
Transportation costs, trade restrictions, costs of non-tradable inputs, perfect information, and other players in the foreign exchange market
What are problems with purchasing power parity?
When the spot exchange rate is greater than the purchasing power parity exchange rate
What is an overvalued currency?
The predicted change in the exchange rate of Brazilian real to the US dollar if inflation in the US was 11% and inflation was 105% in Brazil
What is increase by 94%, meaning the Brazilian real is depreciating against the US dollar?
The slope of the Big Mac index
What is positive?
The price of a single good in country A increases because the price of the same good in country B is significantly higher
What is strong demand and decreased supply?
Exchange rates are determined by the levels of average prices in different markets
What is implied by purchasing power parity?
or
What is absolute purchasing power parity?
When the spot exchange rate is less than the purchasing power parity exchange rate
What is an undervalued currency?
The predict change in the exchange rate if the current exchange rate of the euro to the Swiss franc is €1.10/₣1 and a basket of goods in Germany costs €300 and the same basket of goods costs ₣260 in Switzerland
What is 4.90%
Country with the most expensive Big Mac
What is Switzerland?
Pusgood = Eus$/f$ × Pfgood
What is the mathematical expression of the law of one price?
The difference in inflation rates between two countries leads to a change in exchanges rates
What is relative purchasing power parity?
Used to make cross-country comparisons
What is GDP per capita?
The PPP-adjusted per-capita GDP of Mexico if the current GDP of Mexico is MXN$7.5 trillion, the population of Mexico is 127 million, and the PPP exchange rate is MXN$10 / USD$1
What is $5905.51?
General description of countries on the left side of the Big Mac Index graph
What are emerging or developing countries?
Tariffs, transportation costs, and trade restrictions
What are frictions?
Countries in the top 12 of PPP-adjusted GDP but not in the top 12 of nominal GDP
What are Indonesia and Mexico?
The average cost of a Big Mac in the United States
What is about $5?