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Relative Purchasing Power Parity is an economic theory which predicts a relationship between the inflation rates of two countries over a specified period and the movement in the exchange rate between their two currencies over the same period.
When doing longitudinal (time series) calculations, it is common to set a value for the base year [citation needed] to make interpretation of the results easier. In basic microeconomics, the terms of trade are usually set in the interval between the opportunity costs for the production of a given good of two nations.
Purchasing power parity (PPP) [1] is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currencies. PPP is effectively the ratio of the price of a market basket at one location divided by the price of the basket of goods at a different location.
The basic model for trade between two countries (i and j) takes the form of F i j = G ⋅ M i M j D i j . {\displaystyle F_{ij}=G\cdot {\frac {M_{i}M_{j}}{D_{ij}}}.} In this formula G is a constant, F stands for trade flow, D stands for the distance and M stands for the economic dimensions of the countries that are being measured.
Balance of trade is the difference between the monetary value of a nation's exports and imports of goods over a certain time period. [1] Sometimes services are also considered but the official IMF definition only considers goods. The balance of trade measures a flow variable of exports and imports over a given period of time. The notion of the ...
Let us assume that the real interest rate is equal across two countries (the US and Germany for example) due to capital mobility, such that $ = €. Then substituting the approximate relationship above into the relative purchasing power parity formula results in the formal equation for the International Fisher effect
The CAGE Distance Framework identifies Cultural, Administrative, Geographic and Economic differences or distances between countries that companies should address when crafting international strategies. [1] It may also be used to understand patterns of trade, capital, information, and people flows. [2]
Joseph Stiglitz applied factor price equalization to a dynamic economy to study the long term supply responses of capital from the classical perspective. He showed that the high interest economy is eager to trade with the low interest rate economy, and consequently it has a lower long term consumption in free trade than pre-trade.