Finance 40500: International Finance

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Finance 40500 International Finance

• PPP and the Big Mac

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We can actually think of a Big Mac as an index of
commodity prices
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Relative dollar Prices (PPP 100)
Foreign Currency per Dollar
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As an index, the Big Mac index works pretty well.
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These figures suggest that deviations from PPP
are very persistent!
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These figures are looking at European currencies
during the ERM relative to the German Mark
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Relative PPP (PPP 0)
Foreign Currency per Dollar
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As earnings rise, prices increase. In
particular, the non-traded component of prices
increases. This should cause an overvaluation of
wealthy countrys currencies relative to poorer
countries.
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