scholarly journals Burgernomics: An Instructional Case on the Law of One Price

2016 ◽  
Vol 12 (2) ◽  
pp. 77-82
Author(s):  
Carolin E. Schmidt
Keyword(s):  
New York ◽  
Financial Markets ◽  
Undergraduate Students ◽  
Purchasing Power Parity ◽  
International Economics ◽  
Law Of One Price ◽  
Rate Theory ◽  
Power Parity ◽  
Product Pricing ◽  
The Law

Jane just moved back to her hometown in Western New York to start a job at a bank. One evening, she meets her old friend Sally, who traveled the world for the past five months and tells Jane about her experiences with the different price levels in all the countries that she visited. Jane, being a recent graduate in international economics and finance, understands the underlying dynamics that are due to exchange rate theory and sheds light on the price discrepancies prevailing between the different currencies.This case focuses on the construction of the Big Mac index and on conveying the theoretical basis of the index (Purchasing Power Parity and the Law of One Price) to undergraduate students in business and economics. It is appropriate for use in undergraduate courses such as international finance, financial markets or international economics. It could also be used in (international) marketing courses to show the importance of product pricing. 

Purchasing Power Parity and the Law of One Price: Evidence from Commodity Prices in Asian Countries

2015 ◽  
Vol 15 (2) ◽  
pp. 231-240 ◽  
Author(s):  
Mohsen Bahmani-Oskooee ◽  
ABM Nasir
Keyword(s):  
Exchange Rates ◽  
Purchasing Power Parity ◽  
Real Exchange Rates ◽  
Strong Support ◽  
Commodity Prices ◽  
Law Of One Price ◽  
Purchasing Power ◽  
Power Parity ◽  
Industrial Countries ◽  
The Law

Almost all previous studies that have tested the law of one price or Purchasing Power Parity theory (PPP) have used either real effective exchange rates or bilateral real exchange rates which are constructed using CPI or PPI data. Most of these studies have failed to support the PPP mostly due to aggregation bias. A few recent studies, have, therefore used commodity prices in different countries and have provided strong support for the theory. These studies have mostly used data from industrial countries. In this paper, we use individual prices of 52 retail items from 15 cities in Asia and test for stationarity of the real exchange rate and speed of adjustment. We provide support for PPP in 63% of the cases. We also find that using individual prices lead to faster convergence of real rates toward their PPP values.

scholarly journals Semantic Rules, the Law of One Price, Purchasing Power Parity and Exchange Rates: Setting the Record Straight

2021 ◽  
Author(s):  
John Everett Pippenger
Keyword(s):  
Exchange Rates ◽  
Open Economy ◽  
Purchasing Power Parity ◽  
Law Of One Price ◽  
Purchasing Power ◽  
Power Parity ◽  
Theoretical Terms ◽  
Auction Markets ◽  
Covered Interest Parity ◽  
The Law

Semantic rules link purely theoretical terms like “price” and “electron” to things we can measure. Without them, theories cannot be tested empirically. When inappropriate, they produce false rejections. Economists routinely ignore semantic rules. Empirical journal articles essentially never mention them. More to the point, the conventional tests that reject the Law of One Price and Purchasing Power Parity never consider them. As a result, those rejections are unwarranted because such tests use inappropriate semantic rules. Both theories should be restored to not rejected and then retested using the more appropriate semantic rules described here. By using appropriate semantic rules, this paper is able to combine Covered Interest Parity and Purchasing Power Parity into a single theory that links auction markets for financial assets and commodities to auction markets for exchange rates. Using appropriate semantic rules for both theories also explains several puzzles in open economy macroeconomics and opens up broad new vistas for research.

scholarly journals Anomalies: The Law of One Price in Financial Markets

2003 ◽  
Vol 17 (4) ◽  
pp. 191-202 ◽  
Author(s):  
Owen A Lamont ◽  
Richard H Thaler
Keyword(s):  
Economic Theory ◽  
Financial Markets ◽  
Financial Economic ◽  
Law Of One Price ◽  
Present Evidence ◽  
Country Funds ◽  
The Law ◽  
Dual Class Shares ◽  
Dual Class ◽  
Corporate Spinoffs

The Law of One price states that identical goods (or securities) should sell for identical prices. In financial markets the law of one price is thought to hold almost exactly, and is the basis for much of financial economic theory. We present evidence on several examples of violations of this law, including closed-end country funds, twin shares, dual class shares, and corporate spinoffs. We analyze the causes of these violations, and show they all stem from some limits on the extent to which rational arbitrageurs can intervene.

scholarly journals Pembuktian Konsep Law Of One Price (LOOP) Dalam Absolute Purchasing Power Parity Menggunakan The Big Mac Index Antar Negara The Six Cheapest (Indonesia – Malaysia) Per Juli 2021

2021 ◽  
Vol 6 (2) ◽  
pp. 184-198
Author(s):  
Dewi Cahyani Pangestuti ◽  
R. Ferry Riantiarno
Keyword(s):  
Purchasing Power Parity ◽  
Free Market ◽  
Secondary Data ◽  
Law Of One Price ◽  
Purchasing Power ◽  
Power Parity ◽  
The Us ◽  
Us Dollar ◽  
The Absolute ◽  
Descriptive Method

This study aims to prove the existence of the absolute purchasing power parity theory using The Big Mac Index and take the example of The Six Cheapest countries, two of which are Indonesia and Malaysia. The data taken is secondary data that has been measured and processed by The Economist which contains the prices of the Big Mac units sold by each country, in The Big Mac Index is 56 countries with different incomes. The method used is a descriptive method, with the literature method technique. The results show that in the end absolute purchasing power parity will not be formed in the free market. This is stated by the non-meeting points of purchasing power parity under conditions of real consumption. Also, it is proven by the undervalued value of the rupiah and ringgit in Indonesia and Malaysia against the US dollar, as well as the level of consumption of each country that must be adjusted.

Study on the HMM of Nonlinear Nominal Exchange Rates

2011 ◽  
Vol 268-270 ◽  
pp. 1823-1827
Author(s):  
Shuo Zhang ◽  
Xiao Feng Hui
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Nominal Exchange Rate ◽  
Statistical Characteristics ◽  
Rate Theory ◽  
Purchasing Power ◽  
Rate Model ◽  
Power Parity ◽  
Nominal Exchange Rates ◽  
The Exchange Rate

The exchange rate model for the study of the exchange rate theory has very important significance. After analyzing the successful nonlinear model of real exchange rate based on the purchasing power parity (PPP) theory, the nonlinear problem of nominal exchange rate is studied in this paper. Through a research on a period of nominal exchange rate with nonlinear characteristics, a nonlinear statistical model of nominal exchange rate based on the hidden Markov model (HMM) is proposed, and the parameters of the model are estimated. Hypothesis testing shows that the model can accurately describe the statistical characteristics of the nominal exchange rate time series. The parameters showed that the nominal exchange rate model proposed in this paper, to some extent, supports that deviations from purchasing power parity (PPP) are nonlinear mean reversions.

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