gross world product & PPP (1 Viewer)

[mitsui]

My understanding of it:

GWP - aggregate value of all goods and services produced worldwide each year (ie. the total value of all countries' GDP)

it can be meausred in two ways - 1. value of all world output at the $US market exchange rates (convert all currencies into $US)
2 - value of all world output in $US after the purchasing power parities (PPP).

PPP is a method where a bunch of goods' prices r compared in each country (the latest one was Big Mac) and then compare each currency's buying power of the goods to a $US. the PPP method elminates the figure differences btween the currencies due to inflationary etc. and gives a more accurate measurement of the GWP.

my questions:
1. is the first method not used as it overlooks the inflation of each country?
2. wat exactly r the relative and absolute terms of the PPP?

thank you!

 

[felixcthecat]

Relative PPP is concerned with the inflation rate (or in other worlds change of price levels over different periods). The change in the exchange rate is determined by price level changes in both countries.

For example, if prices in the United States rise by 3% and prices in the European union rise by 1% the PPP of the USD has to depreciate by 2% compared to the PPP of the EUR (or alternatively the EUR will appreciate by 2%).

try http://en.wikipedia.org/wiki/Purchasing_power_parity .. basically copied from there, cuz it seems easy to understand enough ^^.. just changed a few wordings which i think seems easier to read, but maybe u'll like the original version better..

or in another of my versions~ relative PPP is where like.. the exchange rate of an economys currency is assumed to be linked/dependant to the inflation rate and where the inflation rate is taken into account

is absolute ppp different from ppp?
and do we need to kno all this? cuz i've been trying to find it for a while and i've never learned it and it doesn't seem to be in my text book.. ><'' this question is so hard it's scaring me.. is it in the syllabus>?? ahh

edit: speaking of it i havn't learned GWP either.. tho it seems easy enough to understand ^^''

 

[mitsui]

LOL!
i cant find much detail on PPP & GWP on both Tim Riley or Leading Edge, that kinda means that it wont be examined in great detail

i got that confusion due to a sheet my teacher typed up on PPP. =\
thx for the web address!. i will have a look on that

 

[felixcthecat]

i only had leading edge as a textbook.. don't think they even mentioned relative ppp in it.. did tthey? but i realli don't think u'd kno it ^^'' heh

 

[mitsui]

i hope not. i onli got a basic idea of it. =|

 

[felixcthecat]

u said u looked in the leadingedge textbook...? did it mention anything about relative ppp in it? cuz i wanna read it if there is, but when i looked yesterday, i couldn't find any.. just maybe i missed it?

 

[insert-username]

I don't think you have to go into the nuances of PPP - just know what it is (an adjustment for the buying power of the currency in each particular country). It's not mentioned in the syllabus, and it's only briefly mentioned in Leading Edge with the stuff on GNI.


I_F

 

[felixcthecat]

phew, i feel a lot more assued now.. is the GNI stuff discussed next to the PPP in the textbook?

 

[insert-username]

In Leading Edge's The Market Economy, yes. It simply mentions that a straight GNI in US dollars is an inaccurate comparison due to the different buying power of currencies in different countries, so the PPP adjustment is made to account for the variations.


I_F

 

[mitsui]

i wouldnt spend too much time on it either
teacher spent couple of lessons juz on it. (got me thinking.. @@)

 

[felixcthecat]

ok... i guess i don't need to be worried about relative ppp then...

 

[Demandred]

Just a hint, if you want bonus marks, research the "Theory of One Price".

 

[felixcthecat]

http://www.coinlink.com/archives/ancientsworth.html

the site has nothing to do with the theory.. besides from the first paragraph.. but this "over simplified" version seems easy to understand enough ^^

"Economists know of "The Theory of One Price" which says that apart from transportation and other incidental differences, any object will have the same price anywhere on Earth. This is perhaps an oversimplification, but it rests on the truth that once prices move above transport costs, commodities flow to where they fetch the most money. For this reason, an ancient Greek coin found in Palestine will have about the same retail price there as it would in New York City."

edit: i think i heard about this theory somewhere... the fact that if u take away transportation all prices are the same..

 

[mitsui]

LOL!
theory of one price?
well it is kinda common sense in a way
if u take away the inflations, transportations, all the exchange rate and craps (which PPP is designed to do).. the price would be the same everywhere?