A Guide to the Purchasing Power Parity Theory

Purchasing-power parity (PPP) is an economic concept that states that the  real exchange rate  between domestic and foreign goods is equal to one, though it does not mean that the  nominal exchange rates  are constant or equal to one.   Put another way, PPP supports the idea that identical items in different countries should have the same real prices in another, that a person who purchases an item domestically should be able to sell it in another country and have no money left over. This means that the amount of purchasing power that a consumer has does not depend on what currency with which he or she is making purchases. The Dictionary of Economics defines the PPP theory as one that states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that  rate of exchange  are equivalent. Understanding Purchasing-Power Parity in Practice To better understand how this concept would apply to real-world economies, look at the United States dollar versus the Japanese yen. Say, for example, that one U.S. dollar (USD) can buy about 80 Japanese yen (JPY). While that would make it appear that United States citizens have less purchasing power, the PPP theory implies that there is an interaction between nominal prices and nominal exchange rates so that, for example, items in the United States that sell for one dollar would sell for 80 yen in Japan, which is a concept known as the real exchange rate. Take a look at another example. First, suppose that one USD is currently selling for 10 Mexican pesos (MXN) on the exchange rate market. In the United States, wooden baseball bats sell for $40 while in Mexico they sell for 150 pesos. Since the exchange rate is one to 10, then the $40 USD bat would only cost $15 USD if bought in Mexico. Theres an advantage to purchasing the bat in Mexico, so consumers are much better off going to Mexico to buy their bats. If consumers decide to do this, we should expect to see three things happen: American consumers desire Mexican Pesos to purchase baseball bats in Mexico. So they go to an  exchange rate  office and sell their American Dollars and buy Mexican Pesos, and this will cause the Mexican Peso to become more valuable relative to the U.S. Dollar.The demand for baseball bats sold in the United States decreases, so the price American retailers charge goes down.The demand for baseball bats sold in Mexico increases, so the price Mexican retailers charge goes up. Eventually, these three factors should cause the exchange rates and the prices in the two countries to change such that we have purchasing power parity. If the U.S. Dollar declines in value to a one to eight ratio to Mexican pesos, the price of baseball bats in the United States goes down to $30 each, and the price of baseball bats in Mexico goes up to 240 pesos each, we will have purchasing power parity. This is because a consumer can spend $30 in the United States for a baseball bat, or he can take his $30, exchange it for 240 pesos and buy a baseball bat in Mexico and be no better off. Purchasing Power Parity and the Long Run Purchasing-power parity theory tells us that price differentials between countries are not sustainable in the long run as market forces will equalize prices between countries and change exchange rates in doing so. You might think that my example of consumers crossing the border to buy baseball bats is unrealistic as the expense of the longer trip would wipe out any savings you get from buying the bat for a lower price. However, it is not unrealistic to imagine an individual or company buying hundreds or thousands of the bats in Mexico then shipping them to the United States for sale. It is also not unrealistic to imagine a store like Walmart purchasing bats from the lower cost manufacturer in Mexico instead of the higher cost manufacturer in Mexico. In the long run, having different prices in the United States and Mexico is not sustainable because an individual or company will be able to gain an arbitrage profit by buying the good cheaply in one market and selling it for a higher price in the other market. Since the price for any one good should be equal across markets, the price for any combination or basket of goods should be equalized. Thats the theory, but it doesnt always work in practice.   How Purchasing-Power Parity is Flawed in Real Economies Despite its intuitive appeal, purchasing-power parity does not generally hold in practice because PPP relies on the presence of arbitrage opportunities — opportunities to  buy items at a low price in one place and sell them at a higher price in another — to bring prices together in different countries. Ideally, as a result, prices would converge because the buying activity would push prices in one country up and the selling activity would push prices in the other country down. In reality, there are various transaction costs and barriers to trade that limit the ability to make prices converge via market forces. For example, its unclear how one would exploit arbitrage opportunities for services across different geographies, since its often difficult, if not impossible, to transport services without additional costs from one place to another. Nevertheless, purchasing-power parity is an important concept to consider as a baseline theoretical scenario, and, even though purchasing-power parity might not hold perfectly in practice, the intuition behind it does place practical limits on how much real prices can diverge across countries. Limiting Factors to Arbitrage Opportunities Anything which limits the free trade of goods will limit the opportunities people have in taking advantage of these arbitrage opportunities. A few of the larger limits are: Import and Export Restrictions: Restrictions such as quotas,  tariffs, and laws will make it difficult to buy goods in one market and sell them in another. If there is a 300% tax on imported baseball bats, then in our second example it is no longer profitable to buy the bat in Mexico instead of the United States. The U.S. could also pass a law  making  it illegal to import baseball bats. The effect of quotas and tariffs were covered in more detail in Why Are Tariffs Preferable to Quotas?.Travel Costs: If it is costly to transport goods from one market to another, we would expect to see a difference in prices in the two markets. This even happens in places that use the same currency; for  instance, the price of goods is lower in Canadian cities such as Toronto and Edmonton than it is in more remote parts of Canada such as Nunavut.Perishable Goods: It may be simply physically impossible to transfer goods from one market to another. There may be a place which sells cheap sandwic hes in New York City, but that doesnt help me if I am living in San Francisco. Of course, this effect is mitigated by the fact that many of the ingredients used in making the sandwiches are transportable, so we would expect that sandwich makers in New York and San Francisco should have similar material costs. This is the basis  of  the Economists famous Big Mac Index, which is detailed in their must-read article McCurrencies.Location: You cannot buy a piece of property in Des Moines and move it to Boston. Because of that real-estate prices in markets can vary wildly. Since the price of land is not the same everywhere, we would expect this to have an impact on prices, as retailers in Boston have higher expenses than retailers in Des Moines. So while purchasing power parity theory helps us understand exchange rate differentials, exchange rates do not always converge in the long run the way PPP theory predicts.

Divorce And The Effects On Children - 1315 Words

The Increase of Marital Conflict in Divorce and the Effects on Children The question continues to be asked, â€Å"Is divorce harmful for children?† Everyone wants their children to be happy; however how does one decide when to choose their own happiness over their child’s? With divorce, parents have to choose to leave their partner even if it is detrimental to their children’s happiness. Over the years, divorce rates continue to increase. The reasons for divorce varies from each couple. However, in all cases it is true that the children involved do not get to decide the outcome. Divorce comes with many other factors that affect the child involved. While some experience increases of stress, decreases of parental competence and parental loss in general; these factors lead to a child having mental and emotional distress (Hughes 2009). Even though each differing factor can lead to distress within the child, the exposure to the marital conflict caused by divorce harms the child the most. Emotional and mental distress from marital conflic t in divorce is caused by loss of security, emotional disorders, and disconnections with other relationships. Parents help to teach positive ways of dealing with negative emotions to their children by positively reacting and coping with their life. However when children do not have that role model, they tend to become emotionally insecure, which means not being able to express their emotions in a positive way or at all. Studies showed thatShow MoreRelatedEffects Of Divorce On Children And Divorce1460 Words   |  6 Pagestoday’s world, most people accept divorce or separation as a way of life. Parents are unaware or do not understand the damage it can have on their children. However, in some instances, it is better to get out of an abusive relationship because that can be as toxic as divorce. On average, 50% of children who are born with married parents, will experience divorce before the age of 18 (Children and Divorce Baucom, 2010-2017). Along with divorce statistics, 40% of children in America are raised withoutRead MoreDivorce Effect On Children : Divorce1825 Words   |  8 PagesApril, 2016 Divorce Effect on Children Divorce seems to become more and more common nowadays. Divorce can be a simple or complicated process depending if children are involved. This process can have negative and positive effects in a child s life. A divorce is the legal process of a marriage coming apart. A divorce with children involve cost more and takes about eleven months for the marriage to end. The majority of the divorces happening in the United States involve children. Divorce has differentRead MoreThe Effects Of Divorce On Children And Children1255 Words   |  6 Pages The effects of divorce on children Throughout time, people from all over the world have chosen to live together, or â€Å"get married†. Marriage is a beautiful thing, but there are some couples who are unable to maintain their relationship, because they choose divorce as a solution to cope with the problems between husband and wife. Although divorce can be solution to cope with problem between the husband and wife, it still has dangerous effects especially on their children. Children with divorced parentsRead MoreEffect Of Divorce On Children1068 Words   |  5 PagesEffects of Divorce on Children While divorce may reduce strain on a failing marriage, it may cause damaging effects on the children. Often times parents are too concerned on the marriage to notice the effects on children. 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Most divorces have children that are really young and due to their age, they do not have any idea how to deal with this type of situationRead MoreDivorce And Its Effects On Children1296 Words   |  6 Pages50% of all the children born to married parents today, will experience the divorce of their parents’ before they are eighteen years old. Divorce in and of itself doesn’t necessarily harm a child, but the conflict between parents does. A child’s behavior correlates directly with the effects of their parents’ separation. Deep emotional wounds are created before, during, and after divorce and separation. It is rare that you find a child that actually wants their parents to separate, unless the ma rriageRead MoreDivorce And Its Effects On Children1343 Words   |  6 Pagesknow that the divorce rate in the United States hovers around fifty percent, including forty percent under the age of 21. In that fifty percent one of every six adults is likely to go through a divorce twice. Not only does divorce affect the adults involved, but forty percent of children in the United States will experience parental divorce (Portnoy, 2008). Children with divorced parents struggle with negative consequences emotionally, mentally, and academically compared to those children from intactRead MoreDivorce And Its Effect On Children998 Words   |  4 PagesDivorce has become very popular in the United States. According to the U.S. Census Bureau, on average 50% of marriages result in a failed marriage. This percentage has been at it’s all time high. Not many couples have sustained a successful marriage in present days. Divorces have been around for a long time, and unfortunately kids have a lways been affected the most according to their age. As a result of divorce, there are many children that have to go through this situation at a very young ageRead MoreThe Effect Of Divorce On Children847 Words   |  4 Pagesbecome more unmanageable. According to Sirvanli-Ozen, recent studies confirm that the impacts of divorce on children are not restricted to the childhood period but are manifest during adolescence and adulthood as well. Many studies on the subject show that children who have experienced parent divorce have a lower degree of psychological accord and lower socioeconomic status in their adulthood (Amato Keith, 1991b; Biblarz Raftrey, 1993; Ross Mirowsky, 1999; Amato, 1996) and have more problemsRead MoreEffect Of Divorce On Children1207 Words   |  5 Pagesmarriages that end in divorce has been steadily increasing. When a marriage ends children are impacted and it’s not only emotional and devastating the couples but this also has a huge effect on the children of all ages involved. Many parents go thro ugh a divorce disaster with little knowledge of the effects that the children may go through. Some of the most common impacts that divorce has on children include the fact that children tend to start to blame themselves for the divorce, adjusting in areas

Did You Know That There Is Such A Thing Called Problem

Did you know that there is such a thing called problem gambling otherwise known as gambling addiction? According to psychguides.com, â€Å"gambling is a diverse activity, so different types of gambling addiction exist as well†. Gambling addiction is a problem where it begins slowly and grows overtime until the victim’s life has become difficult to control. Only recently has this disorder been recognized as an addiction. According to Wikipedia, â€Å"Problem gambling (or ludomania, but usually referred to as gambling addiction or compulsive gambling) is an urge to gamble continuously despite harmful negative consequences or a desire to stop. Problem gambling is often defined by whether harm is experienced by the gambler or others, rather than by†¦show more content†¦Additionally, a person may be trying to distract his or herself to forget uncomfortable and painful emotions as well as personal stress in their lives and may use gambling as a tool to escape from g uilt, depression, helplessness, anger, shame, anxiety, sadness, humiliation, or fear of failure. Equally important, gambling addiction is considered as an impulse-control disorder. A person who has a gambling addiction cannot control their impulse to gamble and will continue to gamble regardless of the consequences. When he or she does not gamble, they experience withdrawal symptoms. Similarly, our brains are affected the same way that alcohol and drugs affect our brain. As brainfacts.org stated, â€Å"When people with gambling disorder watch gambling videos or participate in simulated gambling while their brains are being scanned, scientists can see changes in blood flow in specific brain areas, indicating which areas are more active. In one study, both problem gamblers and cocaine addicts watched videos related to their addictions while in a functional magnetic resonance imaging (fMRI) scanner. Both groups showed diminished activation in the ventral striatum compared to healthy control participants†. In other words, neuroscience research has shown that addicted gamblers have similar features with drug and alcoholic disorders. Our brains have a reward system and likeShow MoreRelatedAnalysis Of The Book Is What Is A True Friend 933 Words   |  4 PagesThus, we can see that the Savior called His disciples His friends. A true friend’s spiritual cleaning not only to those people who communicate with them, but also have a permanent effect. 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Review About Costing To Make Budgetary Control Effective

Question: Discuss about the Costing to Make Budgetary Control Effective? Answer: Ferguson Son Manufacturing Company is using Budgetary Control to control its costs and reduce inefficiencies. Under the current system, the different departments are given monthly budgets and the performance of the departments is compared with the budgets, and any variation is brought to the notice to the plant manager Mr. Robert Ferguson Jr. Moreover, the plant manager emphasises on making tight budgets so that costs can be reduced to the minimum level but this is posing problems to the machine department and the equipment maintenance departments. The supervisors of the departments feel that though they are working hard to meet the budgets, still their performance is far from satisfactory. This is happening due to the traditional costing system being used by the company currently. The costs are being assigned to the activities in the department by machine hours and labour hours in machine department and equipment maintenance department respectively. The factory overhead costs are b eing assigned to the units of products in each department by the number of machine hours being used by the activity multiplied by the overhead rate which is pre determined. The pre determined rate for machine shop would be calculated as total overhead cost divided by the total machine hours available. Currently, many special orders are being taken by the company and for each new order; the machine department needs to set up the machine and adjust it. This requires time and adds up the machine hours needed to produce the product, thus increasing the overhead costs for that product. In the process, the big orders which required lesser set up time are being ignored, and the overall costs for the machine department are increasing. Even though the big size orders will give higher profits but machine hours being wasted on small orders set up thus reducing the profitability and quality of machine department. Also the equipment maintenance department, to meet the budgets is running after th ose activities which require less of labour hours and not by the importance of the activity so that their overhead costs can be reduced. Hence, a machine breakdown in the machine department was not attended by the equipment maintenance department. Hence, the breakdown consumed more time than required and further increased costs for the machine department. Also, the overhead costs are not being assigned to the activities according to their usage of hours, for instance the equipment maintenance department has allocated the costs of supplies it has wasted to other work rather than on which the supplies were wasted. This is because the overhead rate is a common rate for all the activities in the department and hence, the some activities may be assigned higher costs and other low costs. As a result of the above problems, even though the machine department is working very hard, yet due to rush orders and inadequate help from supporting departments, it is not able to meet the budgets. As such, the employees who are working so hard and yet are not able to receive appreciation, their morale will go down, and they may even quit their jobs. Also, the efficiency and inefficiency of a department is not ascertained properly due to inefficient costs allocation. The budgets prepared for different departments should be interrelated and interdependent on each other. A master budget should be prepared and on that basis, the departmental budgets should be prepared. The department budgets should be reviewed in relation to other department budgets. Like due to the inefficiency of equipment maintaining department, the machine department could not solve its hydraulic pressure problem on time and as such had to delay its operations, so a control system which works in coordination with all related departments would give better results. System inefficiencies occur due to costs being allocated by labour and machine hours since big orders that require a lot of time to set up are being disrupted for small rush orders. Hence, the time taken to set again the big orders is adding to the costs of the order and affecting its profitability. To remove this inefficiency, the costs should be allocated to the products by the activities which add to the manufacturing costs and the products requiring more of the expensive activities should be charged more overhead costs than the ones requiring less of the expensive activities. On the face, the small rush orders look profitable but the loss incurred on big orders are more than the profits made by small orders. The company should focus more on products which give the maximum contribution to the company profits like the big orders in this case and according to such importance, the budgets should be allocated. In this case, higher budgets should be allocated for the big orders to the machine department, and all the departments should work in coordination to fulfil the bigger orders first and then the small orders. Like the equipment department gave more importance to the inspection of forklift trucks rather than solving the hydraulics pressure breakdown. This led to time loss for the machine department and hence they could not meet the budgets. Here, the equipment maintainenace department should have solved the machine problem first as the production was being hampered. The budgets should be designed in such a way that the important tasks are taken up first which contribute maximum to the companys profits. The budgetary system should also ensure that costs are assigned to the activities the activities to which it relates to and not any other activity. Activity Based Costing assigns overhead costs to the products in a more logical manner as compared to Traditional Costing. Under ABC, the costs are first assigned to the activities which are the real cause of the occurrence of the overhead. After that, it assigns the costs of those activities to the products or services according to their usage of the activity. Some of the common activities under a manufacturing sector include machine set ups, machine maintenance, quality check; special engineering, etc. the importance of ABC has increased due to an increase in the automation technology which has increased the manufacturing overhead costs. Moreover, some products are produced in large batches while the others in small batches, under such situation, ABC helps in logical allocation of resources. As a result of ABC costing, the management will be able to identify the activities which are resulting in higher costs like set up costs and identify products like small rush orders which are using the most of these activities. Such activities or products could be reviewed, and efforts should be taken to reduce the activity costs wherever possible. Rather than blaming the whole department for high costs, costly activities could be improved. Products which are using more of these expensive activities but contributing less to company revenues should be stopped producing, and those contributing more to the companys profits should be continued. Every company has short term and ling term goals to be achieved, and they make strategies to accomplish these goals. The strategies are executed by the employees of the firm and hence, it is necessary to clearly communicate these goals to the employees, and also the management should align the goals of the individual employees with the company goals. This can be done by employee engagement. While preparing budgets which will help in achieving company goals, the employees should also be referred so that they feel a sense of responsibility and set their goals accordingly. When all the employees are working towards the company goals together, the company is bound to successfully accomplish its goals. The sense of responsibility will increase the productivity of the employees as they feel motivated and increased profitability will lead to higher profits and lower costs for the organization, thus increasing the returns for shareholders. The different ways in which the budgets could be used to change employee behaviour and align goals in the organization include: Budgets to be prepared in consultation with the employees as they are the executors. Budgets clearly communicated to the employees Budgets should clearly state various tasks to be performed by the employees and the expected costs and profits from such tasks so that they know the value of each task and perform them accordingly. Return on Investment (ROI) is a measure of profitability which states whether the company is using its resources in an efficient manner to make profits. A company with higher ROI is better placed in the industry. ROI is calculated by dividing the net income by the average capital employed by the company. Activity Based Costing can be used to make strategic decisions and thus improve the profitability of the company. ABC helps in reviewing a process and thus provides scope for continuous improvement of the process which results in incremental cash flow. The processes or activities which are not yielding high benefits are removed or improved, as a result of which the cash which was tied up in the operations of those processes is freed and there is more of free cash flow. References Kaplan, R., Cooper, R. (1991), Profit Priorities from Activity- Based Costing, Harvard Business Review Cagwin, D., Bouwman, M., (2000), the Association between Activity Based Costing and Improvement in Financial Performance Turney, P.B., (1991), How Activity Based Costing Helps Reduce Costs, Journal of Cost Management, pg. No. 29-35 Swenson, D. 1995. The Benefits of Activity-Based Cost Management to the Manufacturing Industry. Journal of Management Accounting Research, pg. No.167-180. Roztocki, N., Schultz, S.M., (2003), Adoption and Implementation of Activity- Based Costing: A Web Based Survey, State University of New York at New Paltz School of business Joan, M., (2009), Traditional Versus Activity-Based Product Costing Methods: a field study in a Defense Electronics Manufacturing Company, Proceedings from ASBBS Annual Conference Sullivan, J., (2011), Increasing Employee Productivity: The Strategic Role that HR Essentially Ignores, accessed online on 7th Feb, 2016, available at https://www.eremedia.com/ere/increasing-employee-productivity-the-strategic-role-that-hr-essentially-ignores/ Newman, K.M, (2013), How to Align Employees with Your Companys Vision, accessed online on 7th Feb, 2016, available at, https://tech.co/how-to-align-employees-company-vision-2013-10 Mahal, I., Hossain, A., (2015), Activity Based Costing (ABC) An Effective Tool for Better Management, Research Journal of Finance and Accounting, Vol. 6, No.4