Reexamination of the Purchasing Power Parity (PPP) under Cournot Competition

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Reexamination of the Purchasing Power Parity (PPP) under Cournot Competition

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Dai, Meixing

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Meixing Dai

Abstract

This paper reexamines the Purchasing Power Parity (PPP) in an open economy macroeconomic model with Cournot competition in the international trade of a unique good. Foreign and domestic firms have a Cournot perception of foreign and domestic markets and make separate quantity decisions for each market taking the quantity decisions of the other firm as given. In introducing the money, the balance of payments relation and the nominal exchange rate, the PPP implied by the law of one price can be reexamined. We show that the imperfect competition and symetric trade barriers are not enough to break the absolute and relative PPP. But under symmetric trade barriers, asymmetric policy and macroeconomic conditions are sufficient for the absolute PPP not to hold, while asymmetric trade barriers are enough to break it. These results are developed without calling on the role of non-tradable goods, shifts in the consumers’ tastes or technological changes, which are commonly considered as the principal factors to break the absolute and relative PPP. Conditions under which the relative PPP is not verified are discussed.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13906.

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Date of creation: Feb 1995
Date of revision: Oct 1995
Handle: RePEc:pra:mprapa:13906

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F31 - International Economics - - International Finance - - - Foreign Exchange

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Fender, John & Yip, Chong K., 1994. "Open economy macroeconomics under imperfect competition A two-country model," Journal of International Economics, Elsevier, vol. 37(1-2), pages 49-63, August. [Downloadable!] (restricted)
Other versions:
- Fender, J. & Yip, C.K., 1992. "Open Economy Macroeconomics Under Imperfect Cmpetition: A Two Country Model," Discussion Papers 92-18, Department of Economics, University of Birmingham.
Dixon, H.D., 1992. "Imperfect Competition and Open Economy Macroeconomics," Economics Working Papers 1993-1, School of Economics and Management, University of Aarhus.
Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February. [Downloadable!] (restricted)
Other versions:
- James Brander, 1980. "Intra-Industry Trade in Identical Commodities," Working Papers 380, Queen's University, Department of Economics.

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