Purchasing Power Parity PPP
Purchasing Power Parity – If we lived in a world of truly efficient markets then the price of a basket of goods would be the same in all countries. However, anyone who has taken a trip abroad knows that this is not the case. In fact prices for identical items vary quite widely across nations. […]
Inflation rate expectations and exchange rates
Inflation affects the future purchasing power of any currency. If you have inflation in the Eurozone then €1 today will buy more than €1 in the future. In other words the currency becomes less valuable. If two currencies experience different levels of inflation then their purchasing powers will deviate over time, because one currency loses […]
The Law of One Price
The law of one price states that any good must have a single price in all markets. If it does not, then there will be opportunities for arbitrage. However, arbitrage opportunities can only last a short time as markets will quickly work to cancel out the profit from arbitrage. Example of law of one price […]