DOCSLIB.ORG

Currency Valuation and Purchasing Power Parity Currency Valuation and Purchasing Power Parity

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Currency Valuation and Purchasing Power Parity Currency Valuation and Purchasing Power Parity Currency Valuation and Purchasing Power Parity Currency Valuation and Purchasing Power Parity Jamal Ibrahim Haidar Introduction The analytical framework of currency valuation is an intellectual challenge and of influence to economic policy, the smooth functioning of financial markets and the financial management of many international companies. The Economist magazine argues that its Big Mac Index (BMI), based on the price of a Big Mac hamburger across the world, can provide ‘true value’ of currencies. This paper provides ten reasons for why the BMI cannot provide a ‘true’ value of currency, and it proposes adjustments to specific misalignments. The purchasing power parity (PPP) theory postulates that national price levels should be equal when expressed in a common currency. Since the real exchange rate is the nominal exchange rate adjusted for relative national price levels, variations in the real exchange rate represent devia- tions from PPP. It has become something of a stylised fact that the PPP does not hold continuously. British prices increased relative to those in the US over the past 30 years, while those of Japan decreased. According to PPP theory, the British pound should have depreciated (an increase in the pound cost of the dollar) and the Japanese yen should have appreci- ated. This is what in fact happened. despite deviations in the exchange rate from price ratios, there is a distinct tendency for these ratios to act as Jamal Ibrahim Haidar is a consultant in the International Finance corporation of the World Bank. WORLD ECONOMICS • Vol. 12 • no. 3 • July–September 2011 1 Jamal Ibrahim Haidar Despite deviations in anchors for exchange rates. Thus, the exchange rate from exchange rate reverts to the price price ratios, there is a ratio, which can be considered the distinct tendency for these ‘true value’ of the currency. ratios to act as anchors In 1986, The Economist created for exchange rates. a tool for making PPP compari- sons. This tool uses the price of a Big Mac hamburger at home and abroad as the price ratio that reflects the ‘true value’ of the currency. This ratio represents the BMI; it is the nucleus of ‘burgernomics’. The BMI gives a signal about under-valuation and over-valuation of currencies, relative to the actual exchange rate. The PPP school of thought is among the oldest research areas in international finance. The PPP stands as a general form of the law of one price in the geographical arbitrage presence for the same goods at different location. The PPP holds only within strict circumstances – i.e. lack of central bank interventions, trade restrictions, transaction costs and taxes. A reference to PPP helps determine whether the foreign exchange market precisely prices a currency because a currency, typically, reverts to its PPP value over time. The BMI currency pricing model is well embedded in the PPP theory. It is a case of interaction between financial journalism, basic eco- nomic research and foreign exchange markets. This paper uses the occasion of the 25th anniversary of the introduc- tion of the Big Mac Index to provide a broad evaluation of its workings and performance. While the BMI is not perfect, it provides hints about the operation of foreign exchange markets. The second part of the paper provides a literature review of ‘burgernomics’, presents evidence about the BMI and summarises the PPP theory debate. After that, there is a discussion of a set of BMI methodological limitations, and clarification of the BMI bias. The paper ends with a conclusion section. Evidence to date The literature on PPP is large and growing. Froot and rogoff (1995), lan and ong (2003), rogoff (1996), Sarno and Taylor (2002), Taylor and Taylor (2004) and Taylor (2006) are a subset of available literature reviews on the matter. click (1996), ong (1997), and Pakko and Pollard (1996) are among the early contributors to academic research on the 2 WORLD ECONOMICS • Vol. 12 • no. 3 • July–September 2011 Currency Valuation and Purchasing Power Parity BMI, while more recent papers include chen et al. (2007) and clements et al. (2010). Empirically, studies found heterogeneous results while test- ing PPP. Frankel (1979) studied the correlation between exchange rates and inflation (proxied by cPI and then by WPI)1 in the 1920s, finding PPP-supportive results in hyperinflation economies. However, using the same inflation indicators, the same author, among others (Isard 1977; Frankel 1981), rejects PPP for developed countries during the 1970s. nonetheless, inflation and exchange rate non-stationarity invalidates these findings by showing the shortcomings of conventional testing methods. Meanwhile, more recent research (Wu & chen 1999; Pedroni 2004) has rejected PPP validity (i.e. real exchange rate mean rever- sion) by utilising cross-country datasets, while Frankel and rose (1996) empirically validated PPP existence. The above studies, which use cPI or WPI, have at least two shortcom- ings. First, non-tradable goods affect cPI and WPI relative usage across countries. Second, regardless of whether the law of one price holds in a certain market for a specific commodity, cPIs and WPIs behave differ- ently when consumption bundles are not identical, leading to PPP tests’ biased outcomes. Hence, these price indices can lead to heterogeneous results while testing PPP validity. recent studies have shifted their atten- tion to using another price index as a study target. cumby (1996) used The Economist’s BMI, given its uniform composition feature, as the Big Mac ingredients are identical across countries, to assess PPP. The use of the Big Mac decreases the estimation bias given that it meets the ‘identical good’ requirement in the law of one price testing process. However, it does not meet all the requirements of the law of one price – i.e. barriers to trade, wage rate, taxes and productivity differentials. Methodological limitations of the BMI Demand variability The demand for fast food varies across countries. For instance, the north American relationship with the Big Mac is much more ingrained into cul- ture than it is in Asian cultures. For this reason, a direct comparison using the Big Mac Index (BMI) has some problems. First, food regulations differ 1 The study considered PPP valid when the regression coefficient is 1. WORLD ECONOMICS • Vol. 12 • no. 3 • July–September 2011 3 Jamal Ibrahim Haidar across countries. For example, Switzerland and the euro area have much more strict food regulation laws (Switzerland in particular) than the United States. This means that the cost of ‘better’ beef or other parts of a Big Mac is higher in the euro area. Second, there is the social perception and price differential of Mcdonald’s in the In Ukraine, one of different countries. In Switzerland the places to meet and and much of Europe, Mcdonald’s relax is McDonald’s. is more of a ‘nice’ place. It is not surprising for Mcdonald’s in Europe to have multiple storeys and in Switzerland there are video game systems and lounges. In Ukraine, one of the places to meet and relax is Mcdonald’s. This means that, in general, the outlets are located in better places and have higher rent payments in Europe. Also, richer people visit Mcdonald’s in Switzerland and the euro area, and will continue to pay for such goods despite the price. In the United States, however, Mcdonald’s is typically a cheaper place to eat and restaurants would lose a lot more money by increasing prices than in European Mcdonald’s outlets. With such variations, the BMI perpetuates a false idea that a critical analyst can discover anything at all about PPP by comparing hamburgers. Product comparability The theory of purchasing power parity (PPP), the notion that a dollar should buy the same amount in all countries, implies that, in the long term, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. However, the United States, along with most developed economies, subsidises meat, bread (which is made of wheat), lettuce, tomato, eggs, potatoes and all farm products in a Big Mac burger. Also, these countries exercise protectionism on those products as well as adopt a mercantilist approach in the international market. So, how can a Big Mac be a comparable item? For any product to be useful for that purpose, it should be freely tradable between countries, with no country subsidis- ing or taxing it more than another country. Therefore, the Big Mac is less appropriate as an item for price comparison since it would be cheaper in countries that subsidise farm products – and this may lead to a distorted comparison. 4 WORLD ECONOMICS • Vol. 12 • no. 3 • July–September 2011 Currency Valuation and Purchasing Power Parity Exchange rate predictability A ‘weak’ currency, despite its appeal to exporters and politicians, is no free lunch – but it can provide a cheap one. In china, for example, a Mcdonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In the US, in contrast, the same burger costs, on average, $3.71. A difference of this significance makes china’s yuan one of the most undervalued currencies in the most recent BMI, leading to currency misalignments. Since the BMI is based on the idea of PPP, and 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign exchange market. In fact, it costs just $0.15, suggesting that it is undervalued by about 40%. In Brazil a Big Mac costs the equivalent of $5.26, implying that the real is overvalued by 42%. The index also suggests that the euro is overvalued by about 29%.
Load more

Recommended publications
  • The Decline of Neoliberalism: a Play in Three Acts* O Declínio Do Neoliberalismo: Uma Peça Em Três Atos
    Brazilian Journal of Political Economy, vol. 40, nº 4, pp. 587-603, October-December/2020 The decline of neoliberalism: a play in three acts* O declínio do neoliberalismo: uma peça em três atos FERNANDO RUGITSKY**,*** RESUMO: O objetivo deste artigo é examinar as consequências políticas e econômicas da pandemia causada pelo novo coronavírus, colocando-a no contexto de um interregno gram sciano. Primeiro, o desmonte da articulação triangular do mercado mundial que ca- racterizou a década anterior a 2008 é examinado. Segundo, a onda global de protestos e os deslocamentos eleitorais observados desde 2010 são interpretados como evidências de uma crise da hegemonia neoliberal. Juntas, as crises econômica e hegemônica representam o interregno. Por fim, argumenta-se que o combate à pandemia pode levar à superação do neoliberalismo. PALAVRAS-CHAVE: Crise econômica; hegemonia neoliberal; interregno; pandemia. ABSTRACT: This paper aims to examine the political and economic consequences of the pandemic caused by the new coronavirus, setting it in the context of a Gramscian interregnum. First, the dismantling of the triangular articulation of the world market that characterized the decade before 2008 is examined. Second, the global protest wave and the electoral shifts observed since 2010 are interpreted as evidence of a crisis of neoliberal hegemony. Together, the economic and hegemonic crises represent the interregnum. Last, it is argued that the fight against the pandemic may lead to the overcoming of neoliberalism. KEYWORDS: Economic crisis; neoliberal hegemony; interregnum; pandemic. JEL Classification: B51; E02; O57. * A previous version of this paper was published, in Portuguese, in the 1st edition (2nd series) of Revista Rosa.
    [Show full text]
  • The Consumer Price Index and Index Number Purpose W
    1 THE CONSUMER PRICE INDEX AND INDEX NUMBER PURPOSE W. Erwin Diewert, Department of Economics, University of British Columbia, Vancouver, B. C., Canada, V6T 1Z1. Email: [email protected] Paper presented at the Fifth Meeting of the International Working Group on Price Indices (The Ottawa Group), Reykjavik, Iceland, August 25-27, 1999; Revised: September, 1999. 1. INTRODUCTION1 “What index numbers are ‘best’? Naturally much depends on the purpose in view.” Irving Fisher (1921; 533). A Consumer Price Index (CPI) is used for a multiplicity of purposes. Some of the more important uses are: · as a compensation index; i.e., as an escalator for payments of various kinds; · as a Cost of Living Index (COLI); i.e., as a measure of the relative cost of achieving the same standard of living (or utility level in the terminology of economics) when a consumer (or group of consumers) faces two different sets of prices; · as a consumption deflator; i.e., it is the price change component of the decomposition of a ratio of consumption expenditures pertaining to two periods into price and quantity change components; · as a measure of general inflation. The CPI’s constructed to serve purposes (ii) and (iii) above are generally based on the economic approach to index number theory. Examples of CPI’s constructed to serve purpose (iv) above are the harmonized indexes produced for the member states of the European Union and the new harmonized index of consumer prices for the euro area, which pertains to the 11 members of the European Union that will use a common currency (called Euroland in the popular press).
    [Show full text]
  • Gold As a Store of Value
    WORLD GOLD COUNCIL GOLD AS A STORE OF VALUE By Stephen Harmston Research Study No. 22 GOLD AS A STORE OF VALUE Research Study No. 22 November 1998 WORLD GOLD COUNCIL CONTENTS EXECUTIVE SUMMARY ..............................................................................3 THE AUTHOR ..............................................................................................4 INTRODUCTION..........................................................................................5 1 FIVE COUNTRIES, ONE TALE ..............................................................9 1.1 UNITED STATES: 1796 – 1997 ..................................................10 1.2 BRITAIN: 1596 – 1997 ................................................................14 1.3 FRANCE: 1820 – 1997 ................................................................18 1.4 GERMANY: 1873 – 1997 ............................................................21 1.5 JAPAN: 1880 – 1997....................................................................24 2 THE RECENT GOLD PRICE IN RELATION TO HISTORIC LEVELS....28 2.1 THE AVERAGE PURCHASING POWER OF GOLD OVER TIME ................................................................................28 2.2 DEMAND AND SUPPLY FUNDAMENTALS ............................31 3 TOTAL RETURNS ON ASSETS ..........................................................35 3.1 CUMULATIVE WEALTH INDICES: BONDS, STOCKS AND GOLD IN THE US 1896-1996 ....................................................35 3.2 COMPARISONS WITH BRITAIN ..............................................38
    [Show full text]
  • AVAILABLE from a Price Index for Deflation of Academic R&D
    DOCUMENT RESUME ED 067 986 HE 003 406 TITLE A Price Index for Deflation of Academic R&D Expenditures. INSTITUTION National Science Foundation, Washington, D.C. REPORT NO NSF-72-310 PUB DATE 72 NOTE 38p. AVAILABLE FROMSuperintendent of Documents, U.S. Government Printing- Office, Washington, D.C. 20402 ($.25, 3800-00122) EDRS PRICE MF-$0.65 HC-$3.29 DESCRIPTORS Costs; Educational Finance; *Educational Research; Financial Problems; *Financial Support; *Higher Education; Research; Research and Development Centers; *Scientific Research; *Statistical Data ABSTRACT This study relates to price trends affecting research and development (R&D) activities at academic institutions. Part I of this report provides the overall results of the study with limited discussion of measurement concepts, methodology and limitations. Part II deals with price indexes and deflation-general concepts and methodology. Part III discusses methodology and data base and Part IV describes alternative computations and approaches. Statistical tables and charts are included.(Author/CS) cO Cr` CD :w U S DEPARTMENT OF HEALTH EDUCATION & WELFARE OFFICE OF EDUCATION THIS DOCUMENT HASBEEN REPRO DUCED EXACTLY ASRECEIVED FROM THE PERSON OR ORGANIZATION ORIG INATING IT POINTS OFVIEW OR OPIN IONS STATED DONOT NECESSARILY REPRESENT OFFICIALOFFICE OF EDU CATION POSITION OR POLICY RELATED PUBLICATIONS Title Number Price National Patterns of R&D Resources: Funds and Manpower in the United States, 1953-72 72-300 $0.50 Resources for Scientific Activities at Universi- ties and Colleges, 1971 72-315 In press Availability of Publications Those publications marked with a price should be obtained directly from the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C.
    [Show full text]
  • Does Google Search Index Help Track and Predict Inflation Rate? an Exploratory Analysis for India
    Does Google Search Index Help Track and Predict Inflation Rate? An Exploratory Analysis for India By G. P. Samanta1 Abstract: The forward looking outlook or market expectations on inflation constitute valuable input to monetary policy, particularly in the ‘inflation targeting' regime. However, prediction or quantification of market expectations is a challenging task. The time lag in the publication of official statistics further aggravates the complexity of the issue. One way of dealing with non-availability of relevant data in real- time basis involves assessing the current or nowcasting the inflation based on a suitable model using past or present data on related variables. The forecast may be generated by extrapolating the model. Any error in the assessment of the current inflationary pressure thus may lead to erroneous forecasts if the latter is conditional upon the former. Market expectations may also be quantified by conducting suitable surveys. However, surveys are associated with substantial cost and resource implications, in addition to facing certain conceptual and operational challenges in terms of representativeness of the sample, estimation techniques, and so on. As a potential alternative to address this issue, recent literature is examining if the information content of the vast Google trend data generated through the volume of searches people make on the keyword ‘inflation' or a suitable combination of keywords. The empirical literature on the issue is mostly exploratory in nature and has reported a few promising results. Inspired by this line of works, we have examined if the search volume on the keywords ‘inflation’ or ‘price’in the Google search engine is useful to track and predict inflation rate in India.
    [Show full text]
  • WT/GC/W/757 16 January 2019 (19-0259) Page
    WT/GC/W/757 16 January 2019 (19-0259) Page: 1/45 General Council Original: English AN UNDIFFERENTIATED WTO: SELF-DECLARED DEVELOPMENT STATUS RISKS INSTITUTIONAL IRRELEVANCE COMMUNICATION FROM THE UNITED STATES The following communication, dated 15 January 2019, is being circulated at the request of the delegation of the United States. _______________ 1 INTRODUCTION 1.1. In the preamble to the Marrakesh Agreement Establishing the World Trade Organization, the Parties recognized that "their relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development…." 1.2. Since the WTO's inception in 1995, Members have made significant strides in pursuing these aims. Global Gross National Income (GNI) per capita on a purchasing-power-parity (PPP) basis, adjusted for inflation, surged by nearly two-thirds, from $9,116 in 1995 to $15,072 in 2016.1 The United Nations Development Program's (UNDP) Human Development Index (HDI) for the world increased from 0.598 to 0.728 between 1990 and 2017.2 According to the World Bank, between 1993 and 2015 — the most recent year for which comprehensive data on global poverty is available — the percentage of people around the world who live in extreme poverty fell from 33.5 percent to 10 percent, the lowest poverty rate in recorded history.3 Despite the world population increasing by more than two billion people between 1990 and 2015, the number of people living in extreme poverty fell by more than 1.1 billion during the same period, to about 736 million.4 1.3.
    [Show full text]
  • Burgernomics: a Big Mac Guide to Purchasing Power Parity
    Burgernomics: A Big Mac™ Guide to Purchasing Power Parity Michael R. Pakko and Patricia S. Pollard ne of the foundations of international The attractive feature of the Big Mac as an indi- economics is the theory of purchasing cator of PPP is its uniform composition. With few power parity (PPP), which states that price exceptions, the component ingredients of the Big O Mac are the same everywhere around the globe. levels in any two countries should be identical after converting prices into a common currency. As a (See the boxed insert, “Two All Chicken Patties?”) theoretical proposition, PPP has long served as the For that reason, the Big Mac serves as a convenient basis for theories of international price determina- market basket of goods through which the purchas- tion and the conditions under which international ing power of different currencies can be compared. markets adjust to attain long-term equilibrium. As As with broader measures, however, the Big Mac an empirical matter, however, PPP has been a more standard often fails to meet the demanding tests of elusive concept. PPP. In this article, we review the fundamental theory Applications and empirical tests of PPP often of PPP and describe some of the reasons why it refer to a broad “market basket” of goods that is might not be expected to hold as a practical matter. intended to be representative of consumer spending Throughout, we use the Big Mac data as an illustra- patterns. For example, a data set known as the Penn tive example. In the process, we also demonstrate World Tables (PWT) constructs measures of PPP for the value of the Big Mac sandwich as a palatable countries around the world using benchmark sur- measure of PPP.
    [Show full text]
  • How Real Is the Threat of Deflation to the Banking Industry?
    An Update on Emerging Issues in Banking How Real is the Threat of Deflation to the Banking Industry? February 27, 2003 Overview The recession that began in March 2001 has had a generally benign effect on the banking industry, which remains highly profitable and well capitalized. The current financial strength of the industry is an important buffer against the effects of economic shocks. Nevertheless, the Federal Deposit Insurance Corporation (FDIC) routinely considers a number of economic scenarios that could develop over the next several quarters to evaluate factors that could result in the erosion in the financial health of individual banks or the industry. One such scenario that could present a major challenge to the banking industry involves deflation. This paper outlines the current debate over deflation, focusing on its potential effect on the banking industry. What is Deflation and How Does It Affect the Economy? Deflation refers to a decline in the general price level, usually caused by a sharp decline in money or credit supply or a severe contraction in the economy.1 Although sometimes used interchangeably, deflation differs from disinflation -- a falling rate of inflation. Although there have been sector-specific downward price adjustments, the U.S. economy has not experienced an outright decline in the aggregate price level since World War II, except for a brief and mild deflation in 1949.2 However, the inflation rate in the U.S. has fallen steadily since the early 1980s. In order to fully understand the effect of deflation on economic output, it is important to differentiate the concept of a "real" value from a "nominal" value.
    [Show full text]
  • The Big Mac Index: a Shortcut to Inflation and Exchange Rate
    CORE Metadata, citation and similar papers at core.ac.uk Provided by Clute Institute: Journals International Business & Economics Research Journal – July/August 2014 Volume 13, Number 4 The Big Mac Index: A Shortcut To Inflation And Exchange Rate Dynamics? Price Tracking And Predictive Properties Luis San Vicente Portes, Montclair State University, USA Vidya Atal, Montclair State University, USA ABSTRACT The Economist magazine has been publishing the Big Mac Index using it as a rule of thumb to determine the over- or under-valuation of international currencies based on the theory of Purchasing Power Parity since 1986. According to the theory, using the Big Mac as a tradable single-good basket, the Dollar-value of the hamburger should be equalized around the world due to arbitrage. The popularity and following of the Big Mac Index led the authors to the following two questions: 1) How effective is the Big Mac price as an indicator of overall inflation? and 2) how accurate are exchange rate movement predictions based on Big Mac prices? They find that Big Mac prices tend to lag overall inflation rates, which is highly important in studies that use Big Mac prices as measures of affordability or real incomes over time. As a guide to exchange rate movements, there is support for the theory of Purchasing Power Parity, but only as a qualitative indicator of movement in the nominal exchange rate in rich and economically stable countries, proving less effective in forecasting exchange rate movements in emerging markets. The statistical analysis is carried out using data from 1986 to 2012 from The Economist and from the World Bank for 54 countries.
    [Show full text]
  • RBC International Index Currency Neutral Fund
    RBC International Index Currency Neutral Fund Investment objective Performance analysis for Series A as of August 31, 2021 To provide long-term capital growth, while Growth of $10,000 Series A $21,632 minimizing the exposure to currency 26 fluctuations between foreign currencies and the 22 Canadian dollar, by tracking the performance of its benchmark through investment, primarily, in 18 units of iShares Core MSCI EAFE IMI Index ETF (CAD-Hedged). 14 10 Fund details 6 Load Fund Series Currency 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD structure code A No load CAD RBF559 Calendar returns % 30 Inception date October 1998 Total fund assets $MM 557.8 20 Series A NAV $ 12.90 10 Series A MER % 0.62 0 Income distribution Annually -10 Capital gains distribution Annually -20 Sales status Open Minimum investment $ 500 Subsequent investment $ 25 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD Risk rating Medium -12.4 16.4 25.7 5.1 3.6 5.7 14.9 -10.8 22.8 0.4 16.0 Fund Fund category International Equity 2nd 2nd 2nd 1st 4th 1st 3rd 3rd 1st 3rd 1st Quartile Benchmark 100% MSCI EAFE IMI Hedged 100% to 1 Mth 3 Mth 6 Mth 1 Yr 3 Yr 5 Yr 10 Yr Since incep. Trailing return % CAD Net Index 2.0 3.5 12.4 28.3 8.3 9.6 9.4 4.6 Fund 4th 4th 1st 1st 2nd 2nd 2nd — Quartile Notes 713 710 699 669 567 430 221 — # of funds in category Fund’s investment objective changed April 9, 2019 and June 30, 2017.
    [Show full text]
  • The Law of One Price Lagen Om Ett Pris
    LIU-IEI-FIL-A—09/00489—SE Linköping University, Sweden Department of Management and Engineering Master’s Thesis in Finance 15hp The International Business Program Spring 2009 The Law of One Price Evidence from Three European Stock Exchanges Lagen om ett pris Bevis från tre europeiska börsmarknader Author: – Sanna Olkkonen – Supervisor: Göran Hägg The Law of One Price – Evidence from Three European Stock Exchanges Abstract For the last decades the Efficient Market Hypothesis (EMH) has had a vital role in the financial theory. According to the theory assets, independent of geographic location, always are correctly priced due to the notion of information efficiency across financial markets. A consequence of EMH is the Law of One Price, hereafter simply the Law, which is the main concept of this thesis. The Law extends the analysis by stating that in a perfectly integrated and competitive market cross- traded assets should trade for the same common-currency price in every country. This becomes a fact due to the presence of arbitrageurs’ continuous vigilance in the financial markets, where any case of mispricing is acted upon in a matter of seconds by buying the cheaper asset and selling it where the price is higher in order to make a profit from the price gap. Past research reveals that mispricing on cross-traded assets does exist, indicating that there exists evidence of violations of the Law on financial markets. However, in the real world most likely only a few cases of mispricing equal arbitrage opportunities due to the fact that worldwide financial markets are not characterized by the perfect conditions required by Law.
    [Show full text]
  • Measuring the Great Depression
    Lesson 1 | Measuring the Great Depression Lesson Description In this lesson, students learn about data used to measure an economy’s health—inflation/deflation measured by the Consumer Price Index (CPI), output measured by Gross Domestic Product (GDP) and unemployment measured by the unemployment rate. Students analyze graphs of these data, which provide snapshots of the economy during the Great Depression. These graphs help students develop an understanding of the condition of the economy, which is critical to understanding the Great Depression. Concepts Consumer Price Index Deflation Depression Inflation Nominal Gross Domestic Product Real Gross Domestic Product Unemployment rate Objectives Students will: n Define inflation and deflation, and explain the economic effects of each. n Define Consumer Price Index (CPI). n Define Gross Domestic Product (GDP). n Explain the difference between Nominal Gross Domestic Product and Real Gross Domestic Product. n Interpret and analyze graphs and charts that depict economic data during the Great Depression. Content Standards National Standards for History Era 8, Grades 9-12: n Standard 1: The causes of the Great Depression and how it affected American society. n Standard 1A: The causes of the crash of 1929 and the Great Depression. National Standards in Economics n Standard 18: A nation’s overall levels of income, employment and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies and others in the economy. • Benchmark 1, Grade 8: Gross Domestic Product (GDP) is a basic measure of a nation’s economic output and income. It is the total market value, measured in dollars, of all final goods and services produced in the economy in a year.
    [Show full text]