06-2 通漲令到貶值

1. If PPP do not hold, then law of one price would not occur.
PPP may hold only when
(1)transaction cost =0
(2)homogenous good

2. According to PPP:
(i)inflation rate in local higher than other countries --- local curriency depreciate
(ii) inflation rate in local lower than other countries --- local curriency appreciate

For example, if country A s inflation rate is 10% a year while inflation in the rest of the world is 12% a year , then the PPP theory predicts that country A will appreciate by 2% a year.

3. currency trade is mainly determined by commodity trade
Under PPP, when the same kind of good sold in different countries with different price, arbitrage(buy low sell high) occur.

e.g.If the big Mac of HK is cheaper than the same big Mac in USA, then people in USA will practise arbitrage (buy low sell high) , buy low (in HK) and sell high in USA in order to make profit. During the process of arbitrage, the e of the country with cheaper price will rise and the e of the country with higher price will be fall.

***The equilibrium point will be that the price of the same good will be the same all around the world due to the adjustment of the e caused by price difference.

通過arbitrage,trading commodity貨物 = trading $
因為你要用人地國家的currency去買人地的貨

4.PPP may hold only when
(1)transaction cost =0 (both tradable goods and services and tradable assets)