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Unformatted text preview: the same in America as abroad. Let Big Mac PPP be equal to the foreign price in foreign currency divided by the American price in dollars. The foreign currency is overvalued if Big Mac PPP is greater than the actual exchange rate. Why does PPP fail? 1. transportation costs 2. barriers to trade 3. non-traded goods - price of a Big Mac reflects more than just the price of its ingredients 4. imperfect competition - able to engage in price discrimination 5. current account imbalances - trade in assets affects supply and demand for currencies Factors Affecting Exchange Rates foreigners demand dollars to • buy U.S. goods and services • buy U.S. assets Americans sell dollars to • buy foreign goods and services • buy foreign assets 1. changes in real GDP 2. expected future inflation 3. interest rates 4. shifts in demand 5. change in U.S. money supply 6. change in foreign money supply 7. expected future spot exchange rate...
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.
- Fall '09
- Personal Finance