Summary action points fx misalignments in terms of

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4Summary Action Points.FX misalignments in terms of tradable goods prices could haveimplications for trade balances. Other things equal, a currencythat is overvalued in terms of the ILOP may lead to a trade deficitand an undervalued currency may lead to a trade surplus..The APPP condition is a well-known standard of long-run intrinsicFX rates in terms of good prices..Using either theEconomistsBig Mac Index or OECD data, actualspot FX rates are often observed to deviate from the long-runintrinsic FX rates implied by the APPP condition..Models of intrinsic FX rates are useful even if they dontfitthedata, because we get an idea of whether a currency is misvalued andthus may be due for a correction.GlossaryAbsolute purchasing power parity (APPP):A theory that the price of abroad basket of consumption goods in one country should be equal tothe price of a similar basket in another country, after adjusting for theFX rate.International law of one price (ILOP):The principle that the price of atradable good in one country should theoretically be equal to theprice of the same good in another country, after adjusting for theFX rate.J-Curve:Given a drop in the FX price of a currency, a countrys tradebalance tends tofirst drop and later rise.PURCHASING POWER PARITY55O'Brien, Thomas J.. Introduction to Foreign Exchange Rates, Business Expert Press, 2013. ProQuest Ebook Central,.Created from gwu on 2018-09-04 08:59:08.Copyright © 2013. Business Expert Press. All rights reserved.
Organization for Economic Cooperation and Development (OECD):An international organization that fosters economic development.Overvalued currency:A currency with an actual FX price is higher thanits intrinsic FX value.Strong currency:An expression with two interpretations: a currency thatis overvalued or a currency that has been appreciating.Trade deficit:The amount by which the value of a countrys importedgoods exceeds the value of its exported goods.Trade surplus:The amount by which the value of a countrys exportedgoods exceeds the value of its imported goods.Undervalued currency:A currency with an actual FX price is lower thanits intrinsic FX value.Weak currency:An expression with two interpretations: A currency thatis undervalued or a currency that has been depreciating.Discussion Questions1. Explain the self-stabilizing principle for FX rates.2. Discuss the difference between the ILOP and APPP conditions.3. Is a weak U.S. dollar good, bad, or neutral for the U.S. economy?Discuss this question and its CNBC poll results (11/19/03): 37%good; 47% bad; and 16% neutral.

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Purchasing Power Parity, Foreign exchange market, United States dollar, Business Expert Press

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