Question

anyone knowledgeable in relative purchasing power parity (relative ppp) in macroeconomics?

Answer 1

It is just the exchange and inflation rates in two countries that should over a period of time equal out eventually.

Answer 2

im just having a hard time figuring out a graph of relative ppp, think you can help?

Answer 3

@liquidcandy

Answer 4

can i see the graph you are looking at. or is it just in general?

Answer 5

the textbook for my course says,
"The key implication of this concept is that a country’s high inflation over time will put
depreciation pressure on its currency. It also suggests that low and stable inflation will
support a stronger currency while higher and more volatile inflation will weaken a
currency’s value."

based on what i'm seeing in the graph, when the inflation spiked in 2003ish, the currency spiked as well. shouldn't it have decreased since volatile inflation weakens currency's value?

Answer 6

@liquidcandy

Answer 7

Well, currency appreciation decreases inflation so yes it should have decreased.

Answer 8

how does that not happen? is it often for the inflation to go up but currency's value continues to increase?

Answer 9

is relative ppp more of a predictive effect and something that is not guaranteed to occur everytime?

Answer 10

does the "with the dollar as the base currency" have something to do with it?

Answer 11

No, when inflation goes up the value goes down. It is how the government works. And for predictability yes and no. You see if you trying to predict the short-term relative ppp it might be true but it can be very unpredictable unless you do a lot of research and just know how this kind of thing works. Usually, if you're predicting a long-term relative ppp you will get it correct with just understanding what data is given to you.

Answer 12

It sucks because every dollar the Federal Reserve makes, the currency value of a dollar depreciates.

Answer 13

ok gotchya, i thought i was crazy because i thought the question was formed in the space that the graph did support relative ppp and i just had to explain how it did. so im glad i got a second set of eyes on it

Answer 14

the second set follows the curves of the first it is just a smaller incline and decline.

Answer 15

right, but it should be doing the opposite, correct?

Answer 16

no, it still goes up but it does not go up as high as the first second. You can never take away money once it is put out. Unless you burn it but people would get mad. So it goes up but not as much, it has a more slant in it.

Answer 17

If you really want to know about this stuff you should look into learning about stocks.

Answer 18

Stock shareholding literally is what separates the rich from the poor and it is all about what this concept is.

Answer 19

If you can read this graph and understand how a company is doing. And predict if it will grow then you can make millions.

Answer 20

thats rlly interesting, im trying to get into stocks but holding off on going all in till i research more on it and understand all the graphs n such

Answer 21

but i mean for the context of this question,
you said it goes up but not as much?


sorry if im repeating but like i said in 2003 there was a drastic spike. as per relative ppp it should have went down, not increased at all, right?

Answer 22

Where the spike it is where it flattens out on the second set. then decreased as though the second set

Answer 23

also what relevance does the information about the brazilian/$ exchange rate give in the context of the graph? why does it matter?

if relative ppp says inflation goes up & currency exchanges go down, what context does telling us which is which give?

only asking bc my prof usually doesnt put fluff in his hw questions, usually all the info is relevant so i just want to be sure im not missing anything

Answer 24

The information about the brazilian/$ exchange rate is just for an example the is no relevance. It just provides that. It could be any country. And what do you mean by the second question?

Answer 25

oh ok, the 2nd question was pretty much asking the same as the first, just worded diff

Answer 26

so just to clarify : there isn't a pattern between inflation and Brazil's currency value that would support PPP over the time period?

Answer 27

No, The pattern it shows is that when the inflation increases so does the real/dollar. and when then inflation decreases the real/dollar decreased. The real/dollar does it much gradually than the inflation's rigid spikes.

Answer 28

The Relative ppp is as simple as this. "increased inflation will reduce the real purchasing power of a nation's currency and same for the oppisite.".

Answer 29

omg wait i may have this all wrong i am so sorry

pls say if i am wrong, in my head,
low inflation=strong currency value
high inflation=weak currency value

Answer 30

so in ur comment above, r u saying there IS a pattern, it just does not support relative ppp?

Answer 31

This is correct.

low inflation=weak currency value
high inflation=high currency value

that is the pattern

Answer 32

to have relative ppp u need two different nations

Answer 33

this shows one so you can infer that your prof want you to find the pattern in this one nation

Answer 34

So moer inflation equal more real/dollar and low inflation equal low real/money

Answer 35

more*

Answer 36

so
"low inflation=weak currency value
high inflation=high currency value"
is the pattern for THIS graph, but not the pattern if this graph were showing true relative ppp?

Answer 37

whoever you are i apologize for my confusion & have much gratitude for ur knowledge

Answer 38

That is the pattern yes. This graph shows one nation BRAZIL. So yes if you have two nations it depends on their data. But it always flows in an up-down way.

Answer 39

gotchya, thank you so much!

Answer 40

No problem.