Principles of Economics- Mankiw (5th) 650

Principles of Economics- Mankiw (5th) 650 - 672 PA R T E L...

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672 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES would drive up the U.S. price of coffee and drive down the Japanese price. Con- versely, if a dollar could buy more coffee in Japan than in the United States, traders could buy coffee in Japan and sell it in the United States. This import of coffee into the United States from Japan would drive down the U.S. price of coffee and drive up the Japanese price. In the end, the law of one price tells us that a dollar must buy the same amount of coffee in all countries. This logic leads us to the theory of purchasing-power parity. According to this theory, a currency must have the same purchasing power in all countries. That is, a U.S. dollar must buy the same quantity of goods in the United States and Japan, and a Japanese yen must buy the same quantity of goods in Japan and the United States. Indeed, the name of this theory describes it well. Parity means equality, and purchasing power refers to the value of money. Purchasing-power parity states that a
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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