Calculating the exchange rates of the two countries with the the
Publish: 2021-04-21 23:44:34
1. The theory of purchasing power parity is a theory about the determination of exchange rate. It was first put forward by the British economist Thornton in 1802, and then became a part of Ricardo's classical economic theory. Finally, it was developed and enriched by the Swedish economist g. Cassel (1866-1945), and discussed in detail in his book currency and foreign exchange after 1914 published in 1922. The main point of this theory is that people are willing to buy foreign currency because it has purchasing power for goods and services in the country. The domestic currency has purchasing power for domestic goods and services. Therefore, the exchange rate of the two currencies depends on the ratio of the purchasing power of the two currencies in the two countries. When inflation occurs in both currencies, the nominal exchange rate will be equal to the quotient of the original exchange rate multiplied by the inflation rate of the two countries. Although it may deviate from the new nominal exchange rate, the change trend of the exchange rate is always the ratio of the purchasing power of the two currencies. Therefore, the exchange rate calculated in the above way must be regarded as a new parity between the two currencies. This parity is called purchasing power parity. This theory sees that there is a certain relationship between the purchasing power of paper money and the value represented by it, and then thinks that the change of inflation affects the change of exchange rate. However, its theoretical basis is money quantity theory, which ignores the mutual influence and causality between price and exchange rate.
2. Because the real exchange rate comes from the capital flow, and the market is the ultimate force to determine the exchange rate, supply and demand determine the price of money
3. The theory of purchasing
power parity, also known as PPP theory, originated earlier. Later, it was systematically expounded by G. Cassel, a Swedish economist, in his book money
and foreign exchange after 1914 in 1922. It is one of the most influential exchange rate theories. The law of one price is the basic premise of the theory of purchasing power parity< The theory holds that the value of money lies in its purchasing power, so the exchange rate between different currencies depends on the ratio of purchasing power. In other words, there is a direct link between the exchange rate and the price level of each country. There are two forms of purchasing power parity: absolute and relative. Absolute purchasing power parity examines the determination of exchange rate from a static point of view, which shows that the exchange rate at a certain point depends on the ratio of the purchasing power (or price level) of the two currencies. Relative purchasing power parity examines the decision and change of exchange rate from a dynamic point of view. It shows that the change of exchange rate of two countries' currencies in a certain period depends on the ratio of the change rate of purchasing power (or price level) represented by two countries' currencies. In fact, the relative purchasing power parity is based on the absolute purchasing power parity, taking into account the impact of the inflation level of the two currencies
the theory of interest rate parity, also known as forward exchange rate theory or interest rate ruling theory, was first proposed by the British economist J.M. Keynes in 1923, and then developed by other economists such as Einzig
the theory holds that in the case of interest rate differences between the two countries, funds will flow from low interest rate countries to high interest rate countries to obtain higher returns. However, when comparing the yields of financial assets, investors should not only consider the yields provided by the interest rates of the two kinds of assets, but also consider the income changes caused by the exchange rate changes of the two kinds of assets. In order to avoid exchange rate risk, arbitrage business and swap business are often carried out at the same time. That is to say, when investors transfer funds to high interest countries to obtain interest margin, they sell the currency of high forward interest countries and buy the currency of low forward interest countries. As a result, there is a discount for high interest rate currencies and a premium for low interest rate currencies in the forward foreign exchange market. With the continuous arbitrage activities, the forward spread will continue to expand until the two kinds of assets provide the same rate of return. At this time, the forward spread is just equal to the interest rate spread between the two countries, and the interest rate parity is established. The theory of interest rate parity plays an important role in describing the relationship between exchange rate and interest rate, but it also ignores the influence of foreign exchange control, transaction cost, speculation and other factors. According to the interest rate parity to predict the forward exchange rate is often different from the actual situation to a certain extent.
power parity, also known as PPP theory, originated earlier. Later, it was systematically expounded by G. Cassel, a Swedish economist, in his book money
and foreign exchange after 1914 in 1922. It is one of the most influential exchange rate theories. The law of one price is the basic premise of the theory of purchasing power parity< The theory holds that the value of money lies in its purchasing power, so the exchange rate between different currencies depends on the ratio of purchasing power. In other words, there is a direct link between the exchange rate and the price level of each country. There are two forms of purchasing power parity: absolute and relative. Absolute purchasing power parity examines the determination of exchange rate from a static point of view, which shows that the exchange rate at a certain point depends on the ratio of the purchasing power (or price level) of the two currencies. Relative purchasing power parity examines the decision and change of exchange rate from a dynamic point of view. It shows that the change of exchange rate of two countries' currencies in a certain period depends on the ratio of the change rate of purchasing power (or price level) represented by two countries' currencies. In fact, the relative purchasing power parity is based on the absolute purchasing power parity, taking into account the impact of the inflation level of the two currencies
the theory of interest rate parity, also known as forward exchange rate theory or interest rate ruling theory, was first proposed by the British economist J.M. Keynes in 1923, and then developed by other economists such as Einzig
the theory holds that in the case of interest rate differences between the two countries, funds will flow from low interest rate countries to high interest rate countries to obtain higher returns. However, when comparing the yields of financial assets, investors should not only consider the yields provided by the interest rates of the two kinds of assets, but also consider the income changes caused by the exchange rate changes of the two kinds of assets. In order to avoid exchange rate risk, arbitrage business and swap business are often carried out at the same time. That is to say, when investors transfer funds to high interest countries to obtain interest margin, they sell the currency of high forward interest countries and buy the currency of low forward interest countries. As a result, there is a discount for high interest rate currencies and a premium for low interest rate currencies in the forward foreign exchange market. With the continuous arbitrage activities, the forward spread will continue to expand until the two kinds of assets provide the same rate of return. At this time, the forward spread is just equal to the interest rate spread between the two countries, and the interest rate parity is established. The theory of interest rate parity plays an important role in describing the relationship between exchange rate and interest rate, but it also ignores the influence of foreign exchange control, transaction cost, speculation and other factors. According to the interest rate parity to predict the forward exchange rate is often different from the actual situation to a certain extent.
4.
The theory holds that the exchange rate changes of any two currencies should reflect the changes in the price levels of the two countries. The theory of purchasing power parity is a simple application of the law of one price to the domestic price level rather than the price of a single commodity. It is assumed that the Japanese yen price of steel will rise by 10% (11000 yen) relative to the price of steel in the United States (still US $100). According to the law of one price, the exchange rate must rise to 110 yen / US dollar, that is, the US dollar will appreciate by 10%. Applying the law of one price to the price levels of the two countries, we can get the theory of purchasing power parity. The theory holds that if the price level of Japan rises by 10% compared with that of the United States, the US dollar must appreciate by 10%
5. PPP (purchasing power parity) theory shows that the exchange rates of the two countries should be equal after conversion. For example, if the exchange rate of US dollar to RMB is 6, then an article is 1 US dollar in the United States and 6 RMB in China. Only in this way can it be balanced. After the prices of the two countries are given, the exchange rate can be derived. This method of determining the exchange rate is established in the long run, because the short-term fluctuation of the exchange rate is also affected by the changes of a country's politics, interest rates and so on. In the short run, it is more suitable to use the interest rate parity theory
based on the above rules, when the price of a country rises from 6 to 12, for example, when the price of China rises, it is expected that the exchange rate will rise to 12 and the local currency will depreciate in the future, but this is based on the long-term theory, so it does not hold in the short term, just as the RMB has the same pressure and trend of appreciation on the foreign exchange rate.
based on the above rules, when the price of a country rises from 6 to 12, for example, when the price of China rises, it is expected that the exchange rate will rise to 12 and the local currency will depreciate in the future, but this is based on the long-term theory, so it does not hold in the short term, just as the RMB has the same pressure and trend of appreciation on the foreign exchange rate.
6. The theory of relative purchasing power parity was put forward by Cassell in 1918 when he analyzed the relationship between inflation rate and exchange rate ring the first World War. The theory of relative purchasing power parity emphasizes that the difference of inflation rate between base period and forward period must be equal to the difference of exchange rate in this period. If not, there will be arbitrage until the exchange rate is adjusted to be consistent. In practice, the calculation of purchasing power parity can be expressed by consumer price index, wholesale price index or GNP rection index. Formula: new exchange rate of local currency = old exchange rate of local currency ×( Change rate of purchasing power of domestic currency / change rate of purchasing power of foreign currency) = old exchange rate of domestic currency ×( Domestic price index / foreign price index)
7.
Formula: new exchange rate of local currency = old exchange rate of local currency ×( Domestic currency purchasing power change rate / foreign currency purchasing power change rate)
relative purchasing power parity refers to the relative change of currency purchasing power in different countries, which is the decisive factor of exchange rate change. The main factor of exchange rate change is the relative change of money purchasing power or price between different countries; Compared with the period when the exchange rate is in equilibrium, when the purchasing power ratio of the two countries changes. Then the exchange rate between the two currencies must be adjusted
extended data
theoretical formula
purchasing power parity theory reveals the relationship between inflation rate and exchange rate change, which provides a theoretical basis for exchange rate forecast, that is, the expected exchange rate change should be equal to the expected inflation rate difference
However, the exchange rate fluctuation is not only affected by the inflation difference, but also by many other factors, and because of the transportation cost, transaction cost and the segmentation of international market caused by trade barriers and non trade barriers, it is difficult for the public model based on the premise of purchasing power parity to be fully established in reality. Therefore, the exchange rate changes in the short term often deviate from the theory of purchasing power parity However, if the inflation rate can be accurately predicted, the theory can still be established in the long run and the economy with high inflation, which plays a certain role in determining the equilibrium exchange rate of currency and predicting the long-term exchange rate trend8. PPP theory, also known as PPP theory, is one of the most influential exchange rate theories. The law of one price is the basic premise of the theory of purchasing power parity. The theory holds that the value of money lies in its purchasing power, so the exchange rate between different currencies depends on the ratio of purchasing power. In other words, there is a direct link between the exchange rate and the price level of each country. There are two forms of purchasing power parity: absolute and relative. Absolute purchasing power parity examines the determination of exchange rate from a static point of view, which shows that the exchange rate at a certain point depends on the ratio of the purchasing power (or price level) of the two currencies. Relative purchasing power parity examines the decision and change of exchange rate from a dynamic point of view. It shows that the change of exchange rate of two countries' currencies in a certain period depends on the ratio of the change rate of purchasing power (or price level) represented by two countries' currencies. In fact, the relative purchasing power parity is based on the absolute purchasing power parity, taking into account the impact of the inflation level of the two currencies
for example: absolute purchasing power parity: for the same package of instant noodles, it costs 6 yuan to buy in China and 1 dollar to buy in US dollars. According to the theory of purchasing power parity, the exchange rate is 1 dollar = 6 yuan.
relative purchasing power parity: the price of instant noodles in China has increased to 8 yuan, and it has also increased to 1.1 dollar in the United States, and the exchange rate is 1 dollar = 8 / 1.1 = 7.2727 yuan
for example: absolute purchasing power parity: for the same package of instant noodles, it costs 6 yuan to buy in China and 1 dollar to buy in US dollars. According to the theory of purchasing power parity, the exchange rate is 1 dollar = 6 yuan.
relative purchasing power parity: the price of instant noodles in China has increased to 8 yuan, and it has also increased to 1.1 dollar in the United States, and the exchange rate is 1 dollar = 8 / 1.1 = 7.2727 yuan
9. RMB is becoming more and more valuable
Hot content