TEORIAS DE PARIDAD

THEORIES OF PARITY AND THEIR RELATIONSHIP WITH THE ESTIMATE

OF THE VALUE OF THE EXCHANGE RATE

Viviane Andrea Carvajal

Oscar Johao Yepes
International Business Administration

Is it possible what the theories of parity can predict the behavior of the rate of
change? The estimate of the Rates of change, is born soon after different such monetary
variables as, the inflation, which denotes the increase of the prices of the products with
relationship to a currency during a period of certain time; the commercial barriers, as
protection mechanisms that adopt the countries, to reduce the flow of import of goods
and services; the international arbitration that consists on buying in the market where
the price is lower and to sell in the market where the price is higher; this mentioned
factors, they are important when understanding the Theories of the international Parity,
which are used by the investors to determine the value of the rate of change among the
countries.

In accordance with David Ricardo (1927) in conditions of free competition,

absence of costs of transport and barriers to the trade, a same good should have an only
price in any country. According to Isard (1978) The tariff barriers that it faces the trade,
the volatility, the costs of transport, among other, prevent that these prices are constant
in all the countries, even more if one speaks in a short term period, in which is hindered
and it even disables the arbitration where the exchange rates, the prices of goods and
services, they are determined by the different types of markets. It is then when the
Theory of the Purchasing Power Parity of Gustavo Cassel is presented (1925) which
presents two versions, the absolute one and the relative one.

The parity of the absolute purchasing power establishes that the levels of prices
in all the countries should be same when they are expressed in terms of the same
currency. It says that the real prices should be same in all the countries, if it is

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completed, we can calculate the nominal exchange rate in function of the IPC, the
problem with the theory is that not all the goods are easy to transport.

On the other hand the relative PPP affirms that the depreciation between a
foreign currency and another comes given by the inflation difference among the two
countries. The foreign currency that suffers bigger inflation will lose value (it was
depreciated) regarding the other foreign currency. The above-mentioned, opens the
panorama a little in front of what the PPP wants to demonstrate where although it is not
an exact theory for the many aspects that have been mentioned previously, it is able to
be a reasonable approach of what is really wanted: to be able to sell and/or to buy a well
to the same price without keeping in mind the country where it is acquired or it offers. It
is necessary to mention that for a change in the price of goods and services of a country
to other, the consumers bought that same one good in the country that has the lowest
price, until the point that a balance takes place, caused by the offerers, who will try to
control the demand through the increase of the prices.

On the other hand, according to Rogoff (1996), it exists a query that is related
with being able to know which the base is, where it is determined if there is some
approach of the exchange rate that exists or it should exist in a certain country. For it, it
is spoken of the Index Big Mac, which is used to measure the grade of strength or
weakness of a currency in front of other foreign currencies. Keeping in mind that it is
the hamburger Big Mac the most famous in the chain of restaurants McDonald's in all
the countries where it is elaborated and it is good this way among other things to
compare the cost of life in each country. Although, it doesn't predict the exchange
relationship with accuracy, it serves like an analysis tool inside the economic theory that
is being.

It is important to keep in mind that in the measure that a series of behaviors

related with the Monopolies and the Oligopolies take place, control of prices on the
massive consumption products, the restrictions to the trade, tariffs, quotas have more
than enough imports, changes in the preferences of the consumers, short term
international financial movements, among other aspects, it will go away more and more

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the supposition that the Theory of the Parity of the Purchasing power can be given.
However, if it is allowed to act to the exchange rates and the prices during a period of
sufficiently lingering time, it is possible to observe the balance that seeks a Theory, in
which one can acquire oneself good in any part where it takes place or market.

Lastly, we can conclude that beyond the suppositions that can be generated soon after
this Theory, it is necessary to pay a bigger attention to the structural problems that
determine the high transfer from the exchange rate to the inflation and how the
monetary and fiscal politicians, because they can infer in the prices of the products and
services in the world markets.

BIBLIOGRAPHY

Economa Internacional. Teora y poltica. Paul R. Krugman y Maurice

Obstfeld. Ed. Pearson. 7 Edicin. Captulo 15.
CASSEL, G (1925) Rates of exchange and power purchasing parity.
Skandinaviska Kreditaktiebolaget Quarterly Report, (April), pp. 17 - 21

Universidad Nacional Autnoma de Mxico, Intervencin Esterilizada en el

Mercado de Cambio en un rgimen de metas de Inflacin (2009), tomado de
http://redalyc.uaemex.mx/redalyc/pdf/601/60112266003.pdf,

Enrique Garca Rodrguez, Teora de Paridad del Poder Adquisitivo, tomado de

http://www.webpondo.org/files/oct_dic/Teoria%20PPA.pdf

Isard, P. (1978): Exchange rate determination; A survey of popular views and

recent models, Princeton studios in international finance, No 42. International
finance section, Princeton University

Lorena Medina y Antonio E. Noriega; Evidencia sobre la Paridad del Poder

Adquisitivo publicado en el ao 2001, tomado de
http://redalyc.uaemex.mx/redalyc/pdf/416/41611305.pdf

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Ricardo, D (1927): Economic Essays, Londres

Rogoff, K. (1996). The purchasing power parity puzzle, Journal of Economic

Literature, XXXIV (2), 647-68

Simn Sosvilla Rivero; Articulo Teoras de Tipo de Cambio tomado de

http://www.revistasice.com/CachePDF/ICE_858___5F15E751538F75155ED4E
B8EB97284BE.pdf