A Guide to the Purchasing Power Parity Theory

A Guide to the Purchasing Power Parity Theory Purchasing-power parity (PPP) is an economic concept that states that the  real exchange rate  between domestic and foreign goods is equal to one, though it does not mean that the  nominal exchange rates  are constant or equal to one.   Put another way, PPP supports the idea that identical items in different countries should have the same real prices in another, that a person who purchases an item domestically should be able to sell it in another country and have no money left over. This means that the amount of purchasing power that a consumer has does not depend on what currency with which he or she is making purchases. The Dictionary of Economics defines the PPP theory as one that states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that  rate of exchange  are equivalent. Understanding Purchasing-Power Parity in Practice To better understand how this concept would apply to real-world economies, look at the United States dollar versus the Japanese yen. Say, for example, that one U.S. dollar (USD) can buy about 80 Japanese yen (JPY). While that would make it appear that United States citizens have less purchasing power, the PPP theory implies that there is an interaction between nominal prices and nominal exchange rates so that, for example, items in the United States that sell for one dollar would sell for 80 yen in Japan, which is a concept known as the real exchange rate. Take a look at another example. First, suppose that one USD is currently selling for 10 Mexican pesos (MXN) on the exchange rate market. In the United States, wooden baseball bats sell for $40 while in Mexico they sell for 150 pesos. Since the exchange rate is one to 10, then the $40 USD bat would only cost $15 USD if bought in Mexico. Theres an advantage to purchasing the bat in Mexico, so consumers are much better off going to Mexico to buy their bats. If consumers decide to do this, we should expect to see three things happen: American consumers desire Mexican Pesos to purchase baseball bats in Mexico. So they go to an  exchange rate  office and sell their American Dollars and buy Mexican Pesos, and this will cause the Mexican Peso to become more valuable relative to the U.S. Dollar.The demand for baseball bats sold in the United States decreases, so the price American retailers charge goes down.The demand for baseball bats sold in Mexico increases, so the price Mexican retailers charge goes up. Eventually, these three factors should cause the exchange rates and the prices in the two countries to change such that we have purchasing power parity. If the U.S. Dollar declines in value to a one to eight ratio to Mexican pesos, the price of baseball bats in the United States goes down to $30 each, and the price of baseball bats in Mexico goes up to 240 pesos each, we will have purchasing power parity. This is because a consumer can spend $30 in the United States for a baseball bat, or he can take his $30, exchange it for 240 pesos and buy a baseball bat in Mexico and be no better off. Purchasing Power Parity and the Long Run Purchasing-power parity theory tells us that price differentials between countries are not sustainable in the long run as market forces will equalize prices between countries and change exchange rates in doing so. You might think that my example of consumers crossing the border to buy baseball bats is unrealistic as the expense of the longer trip would wipe out any savings you get from buying the bat for a lower price. However, it is not unrealistic to imagine an individual or company buying hundreds or thousands of the bats in Mexico then shipping them to the United States for sale. It is also not unrealistic to imagine a store like Walmart purchasing bats from the lower cost manufacturer in Mexico instead of the higher cost manufacturer in Mexico. In the long run, having different prices in the United States and Mexico is not sustainable because an individual or company will be able to gain an arbitrage profit by buying the good cheaply in one market and selling it for a higher price in the other market. Since the price for any one good should be equal across markets, the price for any combination or basket of goods should be equalized. Thats the theory, but it doesnt always work in practice.   How Purchasing-Power Parity is Flawed in Real Economies Despite its intuitive appeal, purchasing-power parity does not generally hold in practice because PPP relies on the presence of arbitrage opportunities - opportunities to  buy items at a low price in one place and sell them at a higher price in another - to bring prices together in different countries. Ideally, as a result, prices would converge because the buying activity would push prices in one country up and the selling activity would push prices in the other country down. In reality, there are various transaction costs and barriers to trade that limit the ability to make prices converge via market forces. For example, its unclear how one would exploit arbitrage opportunities for services across different geographies, since its often difficult, if not impossible, to transport services without additional costs from one place to another. Nevertheless, purchasing-power parity is an important concept to consider as a baseline theoretical scenario, and, even though purchasing-power parity might not hold perfectly in practice, the intuition behind it does place practical limits on how much real prices can diverge across countries. Limiting Factors to Arbitrage Opportunities Anything which limits the free trade of goods will limit the opportunities people have in taking advantage of these arbitrage opportunities. A few of the larger limits are: Import and Export Restrictions: Restrictions such as quotas,  tariffs, and laws will make it difficult to buy goods in one market and sell them in another. If there is a 300% tax on imported baseball bats, then in our second example it is no longer profitable to buy the bat in Mexico instead of the United States. The U.S. could also pass a law  making  it illegal to import baseball bats. The effect of quotas and tariffs were covered in more detail in Why Are Tariffs Preferable to Quotas?.Travel Costs: If it is costly to transport goods from one market to another, we would expect to see a difference in prices in the two markets. This even happens in places that use the same currency; for  instance, the price of goods is lower in Canadian cities such as Toronto and Edmonton than it is in more remote parts of Canada such as Nunavut.Perishable Goods: It may be simply physically impossible to transfer goods from one market to another. There may be a place which sells cheap sandwic hes in New York City, but that doesnt help me if I am living in San Francisco. Of course, this effect is mitigated by the fact that many of the ingredients used in making the sandwiches are transportable, so we would expect that sandwich makers in New York and San Francisco should have similar material costs. This is the basis  of  the Economists famous Big Mac Index, which is detailed in their must-read article McCurrencies. Location: You cannot buy a piece of property in Des Moines and move it to Boston. Because of that real-estate prices in markets can vary wildly. Since the price of land is not the same everywhere, we would expect this to have an impact on prices, as retailers in Boston have higher expenses than retailers in Des Moines. So while purchasing power parity theory helps us understand exchange rate differentials, exchange rates do not always converge in the long run the way PPP theory predicts.

The Word of God Scripture

The Word of God Scripture Introduction Insatiable nature of human needs and wants has been a subject, which has been explored in various academic, social, and economic fields. In religious circles, the bible forms the backbone of the Christian faith, and it houses sixty-six books written in different genres and by different authors.Advertising We will write a custom essay sample on The Word of God Scripture specifically for you for only $16.05 $11/page Learn More According to Christians, God inspired all the forty authors of the bible, which renders the bible inerrancy and infallible. Significantly, the many genres of the bible enable Christians to understand the word of God easily. However, since the bible is the central book in Christianity, its inerrancy and inspiration has triggered endless and unquenchable desire for better and newer things among humanity. Christian’s perception/definition on bible inerrancy Intellectual realm is where the insatiability of human nature li es, and thus there is need to go beyond what is attainable by mere human ability. In the process of searching for the meaning of existence, human beings have proliferated thousands of different religions in different societies throughout the world, and countless religious writings and sacred texts attempting to satisfy their intellectual conundrum (Imperato 85). Christians are propagating the bible teachings because they view them as inerrant. Inerrancy is in different categories, strict/absolute, limited, or no inerrancy at all. According to Catholics, strict inerrancy means that the bible is free of errors because God inspired the authors (Lindsell 90). On the contrary, the concept of limited inerrancy speculates that, the bible is true on specified areas about morality and faith among others. However, it is errant on matters pertaining scientific or historical events (Stuart 80). Strict inerrancy seems more convincing because the content or words of the bible are from God. Accord ing to Grudem, bible inerrancy means, â€Å"the inerrancy of Scripture means that Scripture in the original manuscripts does not affirm anything that is contrary to fact (49) while others, think there is no scripture, which confirms God inspired the authors.Advertising Looking for essay on religion theology? Let's see if we can help you! Get your first paper with 15% OFF Learn More Relationship between inerrancy and inspiration The liberal Protestants and some Catholics disagree with strict inerrancy of the bible because it is inaccurate on scientific and historical matters and has religious politics (Stuart 67). Catholicism firmly support that the bible is inerrant (Imperato 100). For instance, some of the leaders acknowledge the bible as a firm and faithful book written without error; a book that teaches about God’s salvation (Geisler 294), which means the issue is not debatable per their doctrines. The catholic doctrines teach that God cannot insp ire people to write untrue events in the bible (Geisler 86). Therefore, God inspired both the words and the authors. Inspiration is a strong influence by God to human minds. Catholicism asserts that the words in the bible came directly from God but through the authors (Albl 79). On the other hand, some Protestants assert that, God inspired the original bible writings only (Greek, Armenian) and not the translated versions. â€Å"No single view of inspiration conveys the total and so true picture† (Earle 319). Therefore, God inspired different people to write the bible, which led to many genres. God guided each author to write in a different way depending on the applicable genre during the contemporary times. In relation to inspiration and inerrancy, the genres in the bible open up the human mind to understand God’s message. The various genres of the bible The diverse views about the inerrancy and inspirational nature of the bible remain debatable in churches except in C atholicism. This exemplifies that human will is human characteristic that is never satisfied. If satisfied, it lasts only for a while, which leaves the individual to desire more. Since human will stems from the individual, the general expectation is that the decisions and actions that actualize themselves through free will lead to the long-lasting satisfaction for the individual. However, that is never the case.Advertising We will write a custom essay sample on The Word of God Scripture specifically for you for only $16.05 $11/page Learn More Albl, Martin. Reason, Faith, and Tradition: Explorations in Catholic Theology. Winona,  MN: Anselm Academic, 2009 Earle, Ralph. â€Å"Revelation and Inspiration: The Spoken Word of God. A Contemporary  Wesleyan Theology 1.1 (1983): 319. Geisler, Norman. William E. Nix. A General Introduction to the Bible. England: Moody  Publishers, 1986. Grudem, Wayne. Systematic Theology. Leicester, England: Inter-Varsity Pre ss, 1994. Imperato, Robert. Footings: Creation, World Religions, Personalism, Revelation, and  Jesus Revised. Lanham, Maryland: University Press of America, 2009. Lindsell, Harold. Battle for the Bible. Grand Rapids: Zondervan, 1976. Stuart, Douglas. Inerrancy and Common Sense. Ed. Roger Nicole and Ramsey,  Michaels. Grand Rapids: Baker Book House, 1980.Advertising Looking for essay on religion theology? Let's see if we can help you! Get your first paper with 15% OFF Learn More

Human Services Delivery Essay Example | Topics and Well Written Essays - 2000 words

Human Services Delivery - Essay Example But now people worldwide really doubt whether the Red Cross, is really involved with the same mission. This is due to a series of mishandlings that the American Red Cross has been involved in the recent past, with respect to the relief efforts being carried out following the 9/11 attacks and the Hurricane Katrina in 2005. (www.associatedcontent.com ) Investigation of the response of the American Red Cross to the Hurricane Katrina emergency concentrating mainly the New Orleans area When the Hurricane Katrina crossed over to the US in 2005 and started to ravage the various parts of the US, the New Orleans and the Mississippi areas were the worst devastated. Most of the affected people in these areas felt that, the America Red Cross was very slow in their response to the disaster and the relief work was heavily crippled due to the inadequacy of the shelters across the affected areas of New Orleans and Mississippi. As a result of this they were not in a position to provide adequate food as well as other necessary facilities, which were quite essential for the people during their worst times. Indeed it was the coastal areas that were totally neglected by the Red Cross organization and they argued that there were logistical problems associated with it, since adequate shelters were not set up. It was a really appalling situation since the victims felt that they were neglected by the American Red Cross when compared to the huge funds and donations, which they had received from the American government. It was argued by most of the top officials of the American Red Cross that, the organization felt the need for setting up shelters in areas which did not have risk of getting flooded and was safe for the survivors of the Hurricane Katrina. Most of the people felt that the organization did not make its presence felt in the rural as well as the densely populated areas, which were in dire requirement for relief and rehabilitation. The flood hit areas did not have relief shelt ers and so adequate supply of food and relief materials could not be routed to these coastal areas. The officials also argued that the Hurricane affected areas was so vast that, the organization was not in a position to deal with such a situation properly and in a timely manner. These factors complicated and hampered the whole issue of the flood relief to the New Orleans and the Mississippi areas. The Officials also pinpointed the lack of fuel that was very much required for transporting the essential supplies to the affected areas. But when compared to these areas that were worst hit, the other areas that were present in the other states across the US, were served much better by the American Red Cross. The way the American Red Cross used the 6 core tasks of Case Management in managing the clients during the Katrina emergency. Case Management is a management system, which helps in the administration of the care for individuals who are in a serious state of disturbance both physicall y as well as mentally. Indeed it is through the process of the Case Management, that the people in any social organization are able to prolong and improve the quality of