Please, respond to the attached two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information regarding the topic discussed. No citation required)
Thank you
Please, respond to the below classmate discussion posts (250 words each). Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information regarding the topic discussed. No citation required) Thank you Classmate discussion posts Discussion 1 Maria Valenzuela It would be nice that we can purchase the same product in different countries for the same price. For example, a can of Pepsi or any other product that we buy in the U.S., but it is a brand that you can find all over the world. But unfortunately, import and export costs, as well of materials or ingredients cannot be the same at the country of manufacture and the country you are buying it, and companies as well the government through regulations and taxes decide that. “Purchasing power parity (PPP) is an economic theory of exchange rate determination. It states that the price levels between two countries should be equal. This means that goods in each country will cost the same once the currencies have been exchanged. For example, if the price of a Coca Cola in the UK was 100p, and it was $1.50 in the US, then the GBP/USD exchange rate should be 1.50 (the US price divided by the UK’s) according to the PPP theory. However, if you were then to look at the market exchange rate of the GBP/USD pair, it is actually closer to 1.25. The discrepancy occurs because the purchasing power of these currencies is different” (IG, 2020). The PPP or purchasing power parity makes it hard to come up with realistic comparisons between the different countries where you can buy the same product. For example, I live in the border with Mexico and most people cross the border to buy well-known brands including clothing and technology. It is ridiculous sometimes the prices that you would find in Mexico for Apple computers or a Chanel perfume for example. Hence consumers do not mind crossing the border and purchase them in the U.S. the price is different for the same product. However, some products might be bundled with a different software or extra gift that you would not find at a different country. According to Sarokin, 2019, “comparing housing costs from one country to another can also be challenging, especially when lifestyles may differ significantly. An apartment dweller in New York City has a very different living experience than, say, a reindeer herder in Lapland or a villager in rural Nigeria. To get around these difficulties with PPP theory, international organizations like the United Nations and the World Bank have attempted to standardize market-basket comparisons, making whatever adjustments are needed to account for local differences.” The currency value applies to any good or product, and this impacts financial markets and their trade rate. The purpose of PPP is to measure and compare between two currencies and adjust for local purchasing power differences. With this, the U.S. dollar can be impacted either negative or positively, but in this case if the output of goods and services is not growing at a similar rate, inflation will impact the U.S. dollar in a negative way, and the U.S. products will be under valuate in the different countries where the product is sold. This because there are other countries that sell the product for a very cheap price for the same product. Reference: IG. (2020). What is purchasing power parity (PPP)? Retrieved from: https://www.ig.com/en/trading-strategies/what-is-purchasing-power-parity--ppp---191106 Sarokin, D. (2019, November 15). Purchasing Power Parity Theory. Retrieved from: https://smallbusiness.chron.com/purchasing-power-parity-theory-3816.html Discussion 2 Alexis Nunez Using purchasing power parities (PPPs) is the alternative to using market exchange rates. The PPP theory predicts changes in prices resulting from changes in the exchange rate. When a country has price inflation it can be expected that countries with lower inflation rates will most likely see currency depreciation. A currency’s purchasing power is related to the quantity of the currency needed to purchase a given unit of a good, or common basket of goods and/or services. PPP is determined by the cost of living and inflation rates or economic productivity. Purchasing power parity means equalizing the purchasing power of two currencies by taking into account the cost of living and inflation differences (PPP, n.d.).” The GDP regularly influences purchasing power parity. The GDP refers to “the financial value of the items being produced within a country at a given time.” The U.S. monitors GDP through the expenditure approach by gathering data on the money being spent on goods, services, and other items. The book states that “a government increasing the money supply is analogous to giving people more money (Hill & Hult, 2019).” If the growth of the money supply occurs faster than its growth in output, it fuels inflation. According to the PPP theory, a high inflation rate will result in depreciation in its currency exchange rate. With hyperinflation, “the growth in money supply, the rate of price inflation, and the depreciation of the peso against the dollar all moved in step with each other” as predicted by the PPP theory and monetary economics predicts (Hill & Hult, 2019). With a dramatic stabilization plan, “which includes the introduction of a new currency and tight control of the money supply”, an increase in the country’s money supply that increases the amount of available currency, changes the relative demand-and-supply conditions in the for the foreign exchange rate (Hill & Hult, 2019). For the U.S., if the money supply is growing faster than the U.S. output, “dollars will be relatively more plentiful than the currencies of countries where monetary growth is closer to output growth (Hill & Hult, 2019).” This increase in the supply of dollars results in depreciation on the foreign exchange market against currencies of countries with slower monetary growth (Hill & Hult, 2019). It’s important to monitor where wealth is most prominent across the globe, and the international poverty line that is set by the World bank so that poverty can be monitored and income discrepancies be found (Faris, 2019). A drawback of the PPP-based exchange rates is that it’s hard to compare identical products from country to country as many factors change. Product quality and worth can change from one place to the other. Additionally, consumption can differ across the world. In-depth surveys can help identify discrepancies, they may not all be caught. References Faris, S. (2019, February 5). What Is Purchasing Power Parity & How Does it Impact Exchange Rates? Retrieved from Zacks: https://finance.zacks.com/purchasing-power-parity-impact-exchange-rates-10248.html Hill, C. W., & Hult, G. T. (2019). International Business. McGraw-Hill Education. PPP. (n.d.). Retrieved from Economics Online: https://www.economicsonline.co.uk/Global_economics/Purchasing_power_parity.html