This 7 page paper examined four parity theories; two purchasing power parity theories; the absolute purchasing power parity and the relative purchasing power parity, and how it may be impacted by the International Fisher Effect, and two forms of interest rate parity; covered interested rate parity (CIRP) and uncovered interested rate parity (UCIRP). The theories are explained and considered for accuracy. The bibliography cites 8 sources.
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absolute purchasing power parity and the relative purchasing power parity, and how it may be impacted by the International Fisher Effect, and two forms of interest rate parity; covered
interested rate parity (CIRP) and uncovered interested rate parity (UCIRP). Looking first to purchasing power parity theories, this theory is one of the way that the
exchange rates may behave between two different countries according to the price levels in those countries (Anonymous, 2001). The basis of the theory is that goods or services should be
the same in different countries if there were a single or common currency (Anonymous, 2001). The theory is based on price; the Law of One Price this is a
no arbitrage condition that tells us the price in two different nations should identical when the currency is converted into that of the comparative nation (Anonymous, 2001).
Looking first at Absolute Purchasing Power Parity (or PPP) the spot exchange rate is determined by relative prices for a collection of similar goods in the different nations
(Anonymous, 2001), for example we can look at the price of butter in the United States and in the United Kingdom; * D=US$/UK? * Abiding by this law of one
price butter in the united kingdom should be *D = butter price in the United States. * Therefore D should be equal to the price of butter in the United
States/the price of butter in the United Kingdom (Anonymous, 2001). This example is a PPP for a single item, but if we look at the world around
us this does not hold true. We all know that when we are on holiday abroad there are some items which will be more expensive and some items that will