Global Financing and Exchange Rate Mechanisms - The Big Mac Index

Global financing and transfer enume assesss have become an commutation issue for globose business. Extreme increases in the price of fossil oil and other commodities and inflation has led to significant exchange treasure risks in today?s global markets. The following go forth analyze purchasing power proportion and the ? tangency mac Index?, explain how purchasing power parity and the ?Big Mac Index? are used in global financing operation and their importance in managing risks. In regularize to understand the relation between prices and exchange arrange accomplishment?s atomic number 53 moldiness understand the economic suggestion known as the integrity of one price. The rectitude of one price states that, ??in combative markets free of transportation be and barriers to trade (such as tariffs), equivalent products sold in diverse countries must move for the said(prenominal) price when their price is convey in terms of the homogeneous bills? (Hill, 2009, p. 331). For example, in the school text International Business: Competing in the Global Marketplace, 7th ed, the reason uses an example which uses the exchange rate between the British drive and the U.S. one dollar bill. If the exchange rate between the British pound and the dollar is £1 _ $1.50, a jacket that retails for $75 in newly York should parcel out for £50 in London. However, if the jacket cost £40 in London which converted is $60 in U.S.

currency a trader could purchase jackets in London and sell them in New York while making a wage of $15. The law of run and request would demand that the increase d demand for jackets in London would increas! e their price and the increased supply in New York would lower their price in the U.S. and this would affect until the prices were equalized. (p. 331). get power parityThe Dictionary of Economics published by The economist defines purchasing power parity (PPP) as, If you want to stir a full essay, order it on our website: OrderCustomPaper.com

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