Lecture 8: Parity Models and Foreign Exchange Rates. Evaluating Current Spot Rates and Forecasting Rates with Parity Models: The Purchasing Power Parity Model. Where is this Financial Center?. Frankfurt: Home of the ECB. New ECB Towers: Completion Date 2014. What are Parity Models?.
Evaluating Current Spot Rates and Forecasting Rates with Parity Models:
The Purchasing Power Parity Model
October 14, 2010
Interpreting the Data
In the United States, a Big Mac costs $3.71.
While in China, a Big Mac costs 14.5 yuan.
Given the Oct 2010 exchange rate (USD/CNY) of 6.6514 a Big Mac in China worked out to $2.18 (14.5/6.6514). Note this is the Big Mac price on the chart.
The Absolute PPP for the yuan is the ratio of the yuan cost to the dollar cost, or: 14.5/3.71 = 3.9084.
Comparing spot (6.6514) to PPP (3.9084) suggested that the yuan was undervalued by 41%
(6.6514-3.9084/6.6514 = .41%)
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Tariffs and Quotas (Rice)
The Canadian Dollar