Purchasing power parity theory of exchange rate determination essay

6008 assessment 5

International Trade: Economic Analysis 5

Overview

In 3–4 pages, analyze the concept of exchange rate and explain the purchasing power parity theory of exchange rates. Explain why a quota is more detrimental to an economy than a tariff.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

Competency 2: Analyze the impact of macroeconomic principles, theories, policies, and tools in real world business situations.
- Analyze the concept of exchange rate.
- Explain the purchasing-power-parity theory of exchange rates.
- Explain why a quota is more detrimental to an economy than a tariff.
Competency 4: Communicate in a manner that is professional and consistent with expectations for members of the business professions.
- Correctly format citations and references using current APA style.
- Write content clearly and logically with correct use of grammar, punctuation, and mechanics.

Context

Globalization and international trade play a very important role in today’s highly interconnected global economy. There are a series of economic relationships that affect the world economies through the exchange of goods and services, international investing through multinational corporations, and interconnected financial markets.

Questions to Consider

As you prepare to complete this assessment, you may want to think about other related issues to deepen your understanding or broaden your viewpoint. You are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of your professional community. Note that these questions are for your own development and exploration and do not need to be completed or submitted as part of your assessment.

What is your level of knowledge with regard to free trade?
How does free trade impact (both negatively and positively) the country’s economy?

Resources

Suggested Resources

The resources provided here are optional and support the assessment. They provide helpful information about the topics in this unit. You may use other resources of your choice to prepare for this assessment; however, you will need to ensure that they are appropriate, credible, and valid. The MBA-FP6008 – Global Economic Environment Library Guide can help direct your research. The Supplemental Resources and Research Resources, both linked from the left navigation menu in your courseroom, provide additional resources to help support you.

International Trade Theory and Principles

The resources below provide information about international trade theory and principles.

Van Bergen, J. (2016). 6 factors that influence exchange rates. Retrieved from http://www.investopedia.com/articles/basics/04/050704.asp
Callen, T. (2012). Purchasing power parity: Weights matter. Retrieved from http://www.imf.org/external/pubs/ft/fandd/basics/ppp.htm
Dutta, N. (2016). Difference between tariff and quotas. Retrieved from http://www.economicsdiscussion.net/difference-between/difference-between-tariff-and-quotas-with-diagram/6437
McConnell, C., Flynn, S., & Brue, S. (2015). Macroeconomics (20th ed.). New York, NY: McGraw-Hill Education.
- Chapter 20, “International Trade,” pages 442–466.
- Chapter 21, “The Balance of Payments, Exchange Rates, and Trade Deficits,” pages 470–489.
Assessment Instructions

Requirements

This assessment has two parts. Be sure to complete both parts before submitting.

Part 1

Analyze the concept of exchange rate.
- Explain how the dollar price of euros is determined.
- Identify a factor that can increase the dollar price of euros.
- Identify a factor that can decrease the dollar price of euros.
- Explain why a rise in the dollar price of euros means a fall in the euro price of dollars.
Explain the purchasing power parity theory of exchange rates, using the euro-dollar exchange rate as an example.

Part 2

Explain why a quota is more detrimental to an economy than a tariff that results in the same level of imports as the quota.
- What is the net outcome of either tariffs or quota for the world economy?

Organize your assessment logically with appropriate headings and subheadings. Support your work with at least 3 scholarly or professional resources and follow APA guidelines for your citations and references. Be sure you include a title page and reference page.

Additional Requirements

Include a title page and reference page.
Number of pages: 3–4, not including title page and reference page.
Number of resources: At least 3.
APA format for citations and references.
Font and spacing: Times New Roman, 12 point; double-spaced.