7Law of One Price and Purchasing Power Parity文档格式.docx

7Law of One Price and Purchasing Power Parity文档格式.docx

《7Law of One Price and Purchasing Power Parity文档格式.docx》由会员分享，可在线阅读，更多相关《7Law of One Price and Purchasing Power Parity文档格式.docx（11页珍藏版）》请在冰豆网上搜索。

However,arbitrageopportunitiessometimesexist,eveninthedomesticeconomy（e.g.tickettouts）.SoanexampleofthisisifU2arehavingaconcertinDublinbutthepriceofaticketis€100inCorkbut€120inDublin.Thereisopportunityforarbitrage,somebodycouldbuytheticketinCorkandresellitinDublinandmakea€20profit.

Arbitrageistheprocessofbuyingorsellingsomethinginordertoexploitapricedifferentialsoastomakearisklessprofit.

But,arbitrageurssometimesencountertransactioncosts.

Transactioncostsareallthecostsassociatedwithatransaction,overandabovethecostoftheitemthatactuallychangeshands.

Arbitragewillceasetobeprofitablewhenpricedifferentialisnogreaterthantransactioncostperitem.Sofromourexampleaboveifthetransactioncostis€30thenarbitragewouldnotbeprofitableas€30（transactioncost）>

€20（Profit）.

Thelawofonepriceholdsinthedomesticeconomyiftransactioncostsareallowed:

Px=Py+C（2.1）

Where

Px=PriceofgoodsinareaX

Py=PriceofgoodsinareaY

C=TransactionCosts

Competitivedistributorsofgoods（e.g.wholesalers,retailers）actasarbitrageurs.Thepriceofidenticalgoodsmaydifferbetweenshops–buteffectivelyretailingservices（whichmaydiffer,e.g.convenience）arealsobeingbought.ForexamplethinkoftheserviceyoureceiveinDunneStoresversesBrownThomas.

ExamplesofGoodsandServicesandtheLawofOnePrice

GenericGoods:

Thelawofonepriceholdsverywellforgenericgoodsinthedomesticeconomyforexamplebread,meat,potatoes.

DifferentiatedGoods:

It’srarewefindgoodsthatarecompletelyidentical.TheLawofOnepricerelatesonlytoidenticalgoods.

RelativePrices:

PriceofanidenticalhouseinCorkCityandinKenmarewouldlikelybedifferent.Howeveryouwouldexpecttherelativepricetobeconstant.ForexamplethatthepriceofathreebedroomdetachedhouseinCorkCityis1.5timesthatofthesamehouseinKenmare.

Non-TradedGoods:

Non-tradedgoods（a.k.a.non-tradable）areitems（usuallyservices）forwhichinterregionalpricedifferentialscannotbeeliminatedbyarbitrage.

ThepriceofastandardhaircutinCorkCitycandeviatefromthepriceofastandardhaircutinWilton.Evenifdemandissimilar,thecostofrent,rates,wagesandsoonwillbegreaterinCorkCitythanWilton.

Inthiscasearbitrageaswehavediscussedalreadyisruledout.Inthiscasetheshort-termpricedifferentialcanbeverylarge.Itisbecauseofthisthatservicessuchashairdressing,motorvehiclerepairing,medicalservicesandsoonandsomegoodssuchashousesaredescribedasnon-tradedgoods.

OpenEconomy

Whatifthetwoareasxandyareindifferentcurrencyzones（notjustdifferentcountries,assomesharecurrency）?

Nowthetransactormustmakeacompoundpurchase–buyforeigncurrency,thenusethatforeigncurrencytobuygoods.E.g.Europriceofadollarxdollarpriceofabook=europriceofabook

Twoidenticalgoodsmustsellforapricethatisthesamewhentranslatedintoacommoncurrency.Forexample,thepriceofanAppleLaptopinIrelandshouldcostthesameintheUSwhenweaccountfortheexchangerateandthetransactioncosts.

Px=SPy+C（2.2）

Px,Py=PriceinCountryXandYrespectivelyineachcountry’sdomesticcurrency

S=priceofaunitofforeigncurrency,inunitsofdomesticcurrency

C=Transactioncost

Mostofwhatwediscussedforthelawofonepriceinthedomesticeconomycanbeappliedtothelawofonepriceintheopeneconomyhoweverwiththelawofonepriceintheopeneconomywemighthavetariffs,abanonwheatetc.TheLawofOnePriceismessedwithwhenthegovernmentintervenes. 

Inthecaseoftheopeneconomyspeculatorsalsofacegreaterrisk,nowtheyarenotonlyatriskofpricesgoingdownbutalsotheyarenowtakingachanceontheexchangerate,itcouldmoveagainstthem.

PriceIndices

Sofarwehavediscussedthepriceofindividualidenticalgoods.Nowwemustlookatthegeneralpricelevel.Inordertoexaminethegeneralpricelevelwemustintroducetheconceptofapriceindex.

AConsumerPriceIndexisaweightedaverageofindividualproductprices,withweightsdeterminedbyexpenditureshares.

Example

Ifthepriceofpetrolwentupby3%andthepriceofsaltwentupby100%andtheweightsare0.1%forsaltand5%forpetrol.Howdowecalculatetheaffectoncostofliving?

（0.001*100%）+（0.050*3%）=0.1%+0.15%

=0.25%

Inthiscasethecostoflivinghasrisenby0.25%

Thereafewassumptionswithregardstopriceindiceswhichneedtobeaccountedfor

1）Expenditurepatternswon’tvaryinresponsetopriceincreases-notalwaysthecase.

2）Aslongaspriceindexweightsremainfixed,pricelevelcomparisonswillonlybevalidforsmallpricechanges

3）Thechoiceofbaseperiodwhenlookingatchangesinpriceindicesisimportant.IfIchooseabaseperiodof1999andthen2005Icouldpotentiallygettotallydifferentresults.Indicesareusefulforexaminingpercentagechangesinpricesbutnotforlookingatabsoluteprices.

ExamplesofIndices

1）CPI:

ConsumerPriceIndex消费者物价指数

2）WPI:

WholesalePriceIndex批发物价指数

3）RPI:

RetailPriceIndex零售物价指数

4）HICP:

HarmonisedIndexofConsumerPrices调和指数

WhatisPurchasingPowerParity

PPPisatheorywhichstatesthattheexchangebetweenonecurrencyandanotherisinequilibriumwhentheirdomesticpurchasingpowersatthatrateofexchangeareequivalent.

Forexample:

ThepriceofbreadintheUKisthesameasthatintheUSafteraccountingfortheexchangerate.

AbsolutePurchasingPowerParity

Forthemomentwewillassumethattransactioncostsarezero.

NowthisfirstequationofPPPisforindividualgoodsandservices.It’samicrolevelview.Soequation2.3issayingthatthelawofonepriceholdswithrespecttotherelationshipbetweenthedomesticandforeignpricesofgoodnumberi.

Pi=SPi*（2.3）

Pi=domesticcountry’spriceofgoodnumberi.

Pi*=foreignpriceofgoodnumberi.

Nowwemoveontoaskwhatcanbesaidaboutthepriceindexforthedomesticeconomycomparedwiththatoftheforeigncountry.Unlessweassumethattheweightsappliedtothedomesticandforeignpriceindexareidenticalwecan’tsaytoomuch.Ifweassumethattheweightsappliedtothedomesticandforeignpriceindexareidenticalthenwegetequation2.4.

Forthegeneralpricelevel

P=SP*（2.4）

P=homecountry’spriceindex

P*=foreigncountry’spriceindex

ThisisthesimplestpossibleversionofthePPPhypothesisandwhatwecallAbsolutePurchasingPowerparity.

AbsolutePurchasingPower:

Thegenerallevelofprices,whenconcertedtoacommoncurrency,willbethesameineverycountry.

AswecanseeAbsolutePPPiscloselyrelatedtotheLawofOnePrice.IfweexcludetransactioncostswecanseethatboththeequationfortheLawofOnePriceandPPParethesame,thedifferenceisthattheLawofOnePricereferstoonlyoneproductwhereasPPPreferstoabundleofproducts.

Thereare3thingstonoteaboutthemacroeconomicviewofPPP.

1）Itamountstotreatingequation2.4asonethatdeterminestheexchangerate.

2）Weareassumingafloatingexchangerate.Inperiodswheretheexchangerateisfixed,PPPeitherfailstoworkorisassumedtofunctioninadifferentway.

3）Themacroeconomicviewdoesnotrelyonthelawofoneprice.Wedonotexpectthelawofonepricetoholdinthecaseofeachindividualgoodandservice,forexampleupwarddeviationsfromthelawofonepriceinthecaseofonegoodwereoffsetbydownwarddeviationsinanothercase.Alsointhiscasewedonotrequireequallyweightedpriceindices.

IfweexaminetheevidencewecanseethatAbsolutePurchasingPowerParitydoesnotfaremuchbetterthantheLawofOnePriceintherealworld.DeviationsfromPPPcanbeverylargeattimeshoweverthereisevidencethatlargedivergencesfromAbsolutePPPtendtoshrinkovertimefortradedproducts.

HoweverweshouldnotwritetheideaofAbsolutePurchasingPowerParityoff.Wemusttakenotethatthepriceindiceswhicharedevelopedarefarfromperfect,PPPcouldinfactbeverymuchaliveintherealworld.Inotherwordsequation2.4couldverymuchbecompletelyvalidbutonlywiththetruepricelevelvariablesthatareunobservableandrelatedonlyverydistinctlytowhatweactuallyobserve.

NowwhethertrueornotPPPisanimportantbenchmarkfortheanalysisofexchangeratemovements,particularlyinsofarastheyaffectinternationalcompetitiveness.Ifwecansaythatthegenerallevelofpricesisareasonableaccurateindexofthecostofproductioninacountry,thentheratioofpricelevelsforanytwocountrieswillserveasameasureofrelativecompetitiveness.

IfwecouldrelyonPPPatalltimesthencompetivenessmeasuredinthiswaywouldbeconstantandequalizedacrossdifferentcountries.Inthiscasenocountrywouldhavecompetitiveadvantageintermsofgeneralprices.Thepostwarworldhasseenthatinternationalcompetitivenessisnotconstant.Forthisreason,weprefertomeasuredeviationsfromPPPandtodothistheRealExchangeRateisused.

RealExchangeRate:

Thepriceofforeignrelativetodomesticgoodsandservicesi.e.