Matakuliah
Tahun
: Keuangan Internasional
: 2009
Purchasing Power Parity
and Real Exchange Rates
Pertemuan 8
Soal 1
• Exercise (Question 6)
If the actual exchange rate for the euro value of
the British pound is less than the exchange
rate that would satisfy absolute PPP, which of
the currencies is overvalued and which is
undervalued ? Why ?
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Soal 1
The terminology of “overvalued” and “undervalued”
refers to the relationship of the exchange rate to the
PPP theory. If the actual exchange rate of euros per
pound is less than the PPP prediction, the euro is
overvalued and the pound is undervalued. We know
this is the correct answer because if the actual
exchange rate were to move to the PPP prediction, the
euro would have to weaken, and the pound would
correspondingly have to strengthen, on the foreign
exchange market. The weakening of the euro would
correct its overvaluation, and the strengthening of the
pound would correct its undervaluation.
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Soal 2
•
Exercise (Problem 3)
Suppose that the price level in Canada is CAD 16,600, the price level
in France is EUR 20,750, and the spot exchange rate is EUR
1.57/CAD.
a. What is the internal purchasing power of the Canadian Dollar ?
b. What is the internal purchasing power of the euro in France ?
c. What is the implied exchange rate of EUR/CAD that satisfies
absolute PPP ?
d. Is the Canadian dollar overvalued or undervalued relative to the
euro ?
e. What amount of appreciation or depreciation of the Canadian
dollar would be required to return the actual exchange rate to its
PPP value ?
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Soal 2
a.
What is the internal purchasing power of the Canadian dollar?
It is probably best to calculate the purchasing power of CAD10,000. If
we divide this amount by the price level in Canada of CAD16,600, we
find
b.
What is the internal purchasing power of the euro in France?
Performing a similar calculation to the one in part a., we find
c.
What is the implied exchange rate of EUR/CAD that satisfies absolute
purchasing power parity?
The implied PPP exchange rate equates the internal purchasing power
of the CAD to its external purchasing power. This implies that the PPP
exchange rate is the ratio of the French price level in euros to the
Canadian price level in Canadian dollars:
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Soal 2
d.
Is the Canadian dollar overvalued or undervalued relative to the euro?
Because the actual exchange rate of EUR1.57/CAD is greater than the
PPP exchange rate, the Canadian dollar is overvalued on the foreign
exchange market because it would have to weaken considerably to
move from EUR1.57/CAD to EUR1.25/CAD.
e.
What amount of appreciation or depreciation of the Canadian dollar
would be required to return the actual exchange rate to its PPP value?
The exchange rate moves from the actual value of EUR1.57/CAD to the
PPP value of EUR1.25/CAD for a percentage change of 1.25/1.57 – 1
= - 0.2038. This is a 20.38% depreciation of the Canadian dollar.
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Soal 3
• Home Work
Soal 3, merupakan tugas perorangan yaitu setiap
mahasiswa diwajibkan untuk menjawab pertanyaan
(Question dan Problem) yang ada disetiap akhir bagian
masing-masing chapter.
Tugas ini dikumpulkan sebelum perkuliahan pertemuan
berikutnya dimulai.
Mahasiswa menjawab Question 2, 11 dan Problem 7
yang ada di halaman 293 - 294
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