# 15.2 Demand and supply shifts in foreign exchange markets  (Page 4/15)

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The exchange rate that equalizes the prices of internationally traded goods across countries is called the purchasing power parity (PPP)    exchange rate. A group of economists at the International Comparison Program, run by the World Bank, have calculated the PPP exchange rate for all countries, based on detailed studies of the prices and quantities of internationally tradable goods.

The purchasing power parity exchange rate has two functions. First, PPP exchange rates are often used for international comparison of GDP and other economic statistics. Imagine that you are preparing a table showing the size of GDP in many countries in several recent years, and for ease of comparison, you are converting all the values into U.S. dollars. When you insert the value for Japan, you need to use a yen/dollar exchange rate. But should you use the market exchange rate or the PPP exchange rate? Market exchange rates bounce around. In summer 2008, the exchange rate was 108 yen/dollar, but in late 2009 the U.S. dollar exchange rate versus the yen was 90 yen/dollar. For simplicity, say that Japan’s GDP was ¥500 trillion in both 2008 and 2009. If you use the market exchange rates, then Japan’s GDP will be \$4.6 trillion in 2008 (that is, ¥500 trillion /(¥108/dollar)) and \$5.5 trillion in 2009 (that is, ¥500 trillion /(¥90/dollar)).

Of course, it is not true that Japan’s economy increased enormously in 2009—in fact, Japan had a recession like much of the rest of the world. The misleading appearance of a booming Japanese economy occurs only because we used the market exchange rate, which often has short-run rises and falls. However, PPP exchange rates stay fairly constant and change only modestly, if at all, from year to year.

The second function of PPP is that exchanges rates will often get closer and closer to it as time passes. It is true that in the short run and medium run, as exchange rates adjust to relative inflation rates, rates of return, and to expectations about how interest rates and inflation will shift, the exchange rates will often move away from the PPP exchange rate for a time. But, knowing the PPP will allow you to track and predict exchange rate relationships.

## Key concepts and summary

In the extreme short run, ranging from a few minutes to a few weeks, exchange rates are influenced by speculators who are trying to invest in currencies that will grow stronger, and to sell currencies that will grow weaker. Such speculation can create a self-fulfilling prophecy, at least for a time, where an expected appreciation leads to a stronger currency and vice versa. In the relatively short run, exchange rate markets are influenced by differences in rates of return. Countries with relatively high real rates of return (for example, high interest rates) will tend to experience stronger currencies as they attract money from abroad, while countries with relatively low rates of return will tend to experience weaker exchange rates as investors convert to other currencies.

In the medium run of a few months or a few years, exchange rate markets are influenced by inflation rates. Countries with relatively high inflation will tend to experience less demand for their currency than countries with lower inflation, and thus currency depreciation. Over long periods of many years, exchange rates tend to adjust toward the purchasing power parity (PPP) rate, which is the exchange rate such that the prices of internationally tradable goods in different countries, when converted at the PPP exchange rate to a common currency, are similar in all economies.

what does nano mean?
nano basically means 10^(-9). nanometer is a unit to measure length.
Bharti
do you think it's worthwhile in the long term to study the effects and possibilities of nanotechnology on viral treatment?
absolutely yes
Daniel
how to know photocatalytic properties of tio2 nanoparticles...what to do now
it is a goid question and i want to know the answer as well
Maciej
Abigail
for teaching engĺish at school how nano technology help us
Anassong
Do somebody tell me a best nano engineering book for beginners?
what is fullerene does it is used to make bukky balls
are you nano engineer ?
s.
fullerene is a bucky ball aka Carbon 60 molecule. It was name by the architect Fuller. He design the geodesic dome. it resembles a soccer ball.
Tarell
what is the actual application of fullerenes nowadays?
Damian
That is a great question Damian. best way to answer that question is to Google it. there are hundreds of applications for buck minister fullerenes, from medical to aerospace. you can also find plenty of research papers that will give you great detail on the potential applications of fullerenes.
Tarell
what is the Synthesis, properties,and applications of carbon nano chemistry
Mostly, they use nano carbon for electronics and for materials to be strengthened.
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is Bucky paper clear?
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so some one know about replacing silicon atom with phosphorous in semiconductors device?
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Do you know which machine is used to that process?
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for screen printed electrodes ?
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What is lattice structure?
of graphene you mean?
Ebrahim
or in general
Ebrahim
in general
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Graphene has a hexagonal structure
tahir
On having this app for quite a bit time, Haven't realised there's a chat room in it.
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China
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many many of nanotubes
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what is the function of carbon nanotubes?
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I'm interested in nanotube
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how did you get the value of 2000N.What calculations are needed to arrive at it
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Equilibrium price is a stable price and it must stay.discuss
Card 14 / 21: What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically?