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Problem Statement Nowadays, most countries are involved in international trade, which requires them to convert their currencies into other countries’ currencies to make investments, and/or export or import goods
Problem Statement
Nowadays, most countries are involved in international trade, which requires them to convert their currencies into other countries’ currencies to make investments, and/or export or import goods. An essential task of economists in any country is the exchange rate determination (or prediction). Fluctuations in the exchange rate, the prices many households pay to obtain foreign-made goods and services are known as imports. For instance, in 2019, the total value of US exports was 1.7 Trillion dollars, and the total value of US imports was 2.5 Trillion dollars.
How is the exchange rate determined?
In the short run, the exchange rate is determined through the interaction of the supply and demand of one currency in exchange for another currency. In the long run, however, the exchange rate is determined using the theory of the Purchasing Power Parity (PPP).
What is the theory of the Purchasing Power Parity (PPP)?
The theory of PPP is the economic principle that states that exchange rates move to equalize different currencies' purchasing power. Economists base the PPP on the fundamental economic idea of The Law of One Price. The Law of One Price states that similar products should sell for the same price everywhere. Price differentials create opportunities for arbitrage profits consisting of moving a product from the low-price market to the high price market until an increase in demand in the low-price market and increase in supply in the high-price market work to eliminate price differentials.
What is the main prediction of the PPP?
The main prediction of the PPP is that the rate of growth of the exchange rate of a currency in terms of another currency is equal to the inflation rate differentials between two countries.
Assignment
Part 1
· Belgium and Switzerland are two countries that are economically similar in terms of their GDP per capita, unemployment rates, and inflation rates. For instance, the US and Canada can be considered economically similar. The price index to be used can be the Consumer Price Index (CPI) or the GDP Deflator. You can visit the website Global Economy.com to easily compare countries to check for similarity - https://www.theglobaleconomy.com/compare-countries/
· Then use the price indices and the exchange rate of these two countries' currencies data to verify the evidence of the theory of PPP.
Data
The data on exchange rate between the two currency can be found at:
The 2020 World Development Indicators (WDI) data which include https://www.ofx.com/en-us/forex-news/historical-exchange-rates/yearly-average-rates/
price indices can be found at:
https://databank.worldbank.org/source/world-development-indicators
A clean version of the latter is attached.
Helpful Resource:
The following YouTube is created to help give you further guidance with Part 1 and the beginning of Part 2 -https://youtu.be/7XdYdK07D1k
Part 2
Task One
Calculate the rate of growth of the exchange rates between two currencies using exchange rate data on your selected countries. Before doing so, please answer the following question.
What is the rate of growth and which formula is used to calculate it?
Display the rates of growth of the exchange rates between the two currencies of your selected countries in Excel or SPSS or Tableau chart/graph over the period 1999-2020.
Task Two
Which of your two selected countries has the higher rate of inflation based on the CPI?
Which of your two selected countries has the higher rate of inflation based on the GDP Deflator?
Calculate the difference between your two selected countries CPI based inflation rate. This difference is the predicted rates of growth of the exchange rate over the period 1999-2020.
Display the predicted rates of growth of the exchange rate of currencies of your selected countries (from both the CPI and the GDP Deflator) in Excel or SPSS or Tableau chart/graph over the period 1999-2020. Then answer the following question.
Is the PPP a theory of the exchange rate determination in the long run based on the CPI? (Hints: You should compare the actual rates of growth of the exchange rates of currencies of your selected countries to the predicted rates of growth of the exchange rates of currencies of your selected countries based on the CPI).
ECON 321 DATA VISUALIZATION HAND
Exchange Rate Determination in the Long Run
Data Evidence of the Theory of
countries are involved in international trade
currencies to make investments
goods. An essential task of economists in any country is the exchange rate determination (or
the prices many households pay to obtain foreign
r instance, in 2019, the total value of US
exports was 1.7 Trillion dollars, and the total value of US imports was 2.5 Trillion dollars.
How is the exchange rate determined?
, the exchange rate is determined through the interaction of the
demand of one currency in exchange for another currency. In the
exchange rate is determined using the theory of the
What is the theory of the Purchasing Power Parity (PPP)?
is the economic principle that states that exchange rates move to equalize
different currencies' purchasing power. Economists base the PPP on the fundamental economic
states that similar products should
the same price everywhere. Price differentials create opportunities for arbitrage profits consisting
of moving a product from the low
price market to the high price market until an increase in
price market and increase in supply
eliminate price differentials.
What is the main prediction of the PPP?
is that the rate of growth of the exchange rate of a currency in
terms of another currency is equal to the
inflation rate differentials between two countries
ECON 321 DATA VISUALIZATION HAND
Exchange Rate Determination in the Long Run – Data Evidence of the Theory of
Due Date: Monday, November 29, 2021
The countries you must work on are Belgium and Switzerland
Nowadays, most countries are involved in international trade, which requires them to convert
their currencies into other countries’ currencies to make investments, and/or export or import
goods. An essential task of economists in any country is the exchange rate determination (or
prediction). Fluctuations in the exchange rate, the prices many households pay to obtain foreign-
made goods and services are known as imports. For instance, in 2019, the total value of US
exports was 1.7 Trillion dollars, and the total value of US imports was 2.5 Trillion dollars.
How is the exchange rate determined?
In the short run, the exchange rate is determined through the interaction of the supply and
demand of one currency in exchange for another currency. In the long run, however, the
exchange rate is determined using the theory of the Purchasing Power Parity (PPP).
What is the theory of the Purchasing Power Parity (PPP)?
The theory of PPP is the economic principle that states that exchange rates move to equalize
different currencies' purchasing power. Economists base the PPP on the fundamental economic
idea of The Law of One Price. The Law of One Price states that similar products should sell for
the same price everywhere. Price differentials create opportunities for arbitrage profits consisting
of moving a product from the low-price market to the high price market until an increase in
demand in the low-price market and increase in supply in the high-price market work to
eliminate price differentials.
What is the main prediction of the PPP?
The main prediction of the PPP is that the rate of growth of the exchange rate of a currency in
terms of another currency is equal to the inflation rate differentials between two countries.
Expert Solution
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