Purchasing Power Parities of the Dollar and Euro
Currently the euro has a purchasing power parity (PPP) of 0.865 vis-à-vis the dollar based on tradables: a basket of internationally traded manufactured goods and tourist services which costs 1 € in the euro zone, comes at 0.865 $ in the USA. In view of an exchange rate of 0.958 $ and based on tradables, the euro was thus overvalued against the dollar by 10.7 percent in mid 2000. Taking an overall economic basket, however, the PPP was 1.078. One GDP unit thus came cheaper by 11.2 percent in mid 2000 in the euro zone than in the USA, so that the euro was undervalued when based on the GDP. The main reason for the discrepancy, i.e., that a GDP unit is cheaper and a unit of tradables is more expensive in the euro zone than in the USA, is the fact that services which are not traded internationally, such as health and education services, are especially expensive, whereas manufactured goods and tourist services are relatively cheap in the USA. In general, the GDP-based PPP is an unsuitable measure of the "fair" level of an exchange rate inasmuch as no country enjoys a price advantage or disadvantage in international trade. After all, large parts of the GDP, and in particular most services and building investments, are hardly if ever traded internationally (in the USA these make up 70 percent of GDP, in the EU 62 percent). Export market shares held by the EU and USA develop closely in line with the tradable-based over- or undervaluation of the euro/ecu against the dollar. Thus, the ecu/euro exchange rate to the dollar between 1987 and 1999 was, on average, 32.6 percent above the PPP of tradables, while at the same time the EU's share of overall exports by the triad (EU, USA, Japan) declined from 68.4 to 63.2 percent, and that of the USA rose from 19.1 to 26.0 percent. Such relationships illustrate not only the impact of sustained price shifts in international trade on relative export growth, but also put calculated PPPs into a plausible light.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 73 (2000)
Issue (Month): 8 (August)
|Contact details of provider:|| Postal: Arsenal Object 20, A-1030 Wien|
Phone: (+43 1) 798 26 01-0
Fax: (+43 1) 798 93 86
Web page: http://www.wifo.ac.at/
More information through EDIRC
|Order Information:|| Postal: Austrian Institute of Economic Research Publikationsverkauf und Abonnentenbetreuung Arsenal, Objekt 20 A-1030 Vienna/Austria|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997.
"Goods Prices and Exchange Rates: What Have We Learned?,"
Journal of Economic Literature,
American Economic Association, vol. 35(3), pages 1243-1272, September.
- Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
- Papell, David H. & Theodoridis, Hristos, 1998. "Increasing evidence of purchasing power parity over the current float," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 41-50, February.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
- Ken Froot & Kenneth Rogoff, "undated". "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
- Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
- Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August.
- John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, November.
- Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
- Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, "undated". "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
- Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
- Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
- Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
- Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
- Thomas Klitgaard, 1999. "Exchange rates and profit margins: the case of Japanese exporters," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 41-54.
- Lothian, James R., 1998. "Some new stylized facts of floating exchange rates," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 29-39, February.
- Stephan Schulmeister, 2000. "Globalization without Global Money: The Double Role of the Dollar as National Currency and World Currency," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(3), pages 365-395, April. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wfo:monber:y:2000:i:8:p:487-500. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ilse Schulz)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.