Week Six – Global Monetary System: Foreign Exchange Market and International Monetary System

While the PPP is an indicator on the relative valuation of currencies for a given basket of goods, it does not totally reflect an imbalance in exchange rates. For instance, there may be unique conditions that influence local prices. Take London and Big Mac’s where there is more involved in a hamburger price than the sum of its ingredients. Take the rent of the franchise – space enters the equation. The population pressure of the greater London area places a very high premium of every square meter of space. Although this high rent finds itself as part of the cost and hence price of the hamburger, it has noting to do with the improper alignment of currencies.

The PPP is important to the tourist industry, decisions regarding offshore manufacturing (low PPP jurisdictions mean lower costs of production because of lower cist of labor, locally sourced components and most other inputs), and possibly as a harbinger of a currency exchange rate change.

If you wish to give some added dimension to the PPP in a business context, looking at the tourist industry may be useful as this would also expose students to the most global of economic activities. It is also multifaceted with airlines, hotel chains, local services etc. as all part of the industry.

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Yours,

Maurice Hladik

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