The Purchasing Power Parity

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Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

Abstract

The research study has been conducted in order to analyze the Purchasing Power Parity between China and Vietnam. The Purchasing Power Parity does not hold between China and Vietnam due to the different factors. The exchange rates between the countries are very different. The currency of Vietnam is much weaker as compare to the Chinese Yuan. The assumptions of the Purchasing Power Parity are unrealistic and therefore cannot be applied on the real world. There is no short-term existence of Purchasing Power Parity due to the fluctuations in the exchange rates and price levels. However, it does hold in the long run due to the stability in the price levels and exchange rates. There have been numerous papers testing the Purchasing Power Parity (PPP) hypothesis. Most of them use variants of traditional unit root tests that super from lack of power. Instead, we use in this paper a mixture version of an exact (small-sample), point wise, most dominant, and non-variant (MPI) test of elliptically symmetric versus spherically symmetric distributions in the context of unit-root of permanent deviations of nominal exchange rates from price differentials. Then, we propose a range for the PPP hypothesis and apply the M-MPI test to various exchange rates with different frequencies and several sub-periods. We conclude that some degree of PPP holds where previous studies could not find any.

Table of Contents

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION6

Background6

Aims and Objectives8

Problem Statement9

Significance9

Rationale9

Research Questions10

CHAPTER 2: LITERATURE REVIEW11

Theoretical Framework11

Absolute and Relative PPP12

Assumptions of the PPP16

CHAPTER 3: METHODOLOGY19

The Model And The M-MPI Unit Root Test19

Search Technique21

Literature Search21

Inclusion and exclusion criteria23

Search terms - key terms23

Additional Online searches23

Management23

Search rationale24

Critical Appraisal tool24

Appraisal limitations24

CHAPTER 4: DISCUSSION AND ANALYSIS26

Testing The PPP Hypothesis28

Summary Output-Regression5

Anova5

Probability Output6

Time Series6

CHAPTER 5: CONCLUSION9

APPENDICES19

Tables and Figures19

CHAPTER 1: INTRODUCTION

Background

Purchasing Power Parity (PPP) can be termed as a relationship between inflation and exchange rate. It is a comparison of the standard of living among the people of two countries. For the exchange rates of the countries to remain in equilibrium, their purchasing power parity must be equal. The concept of the Purchasing Power Parity implies that the price levels in the two countries must be in equilibrium of the exchange rate ratios. If the price levels in one country are increasing, the currency of that country must be depreciated. Thus the Purchasing Power Parity will be in equal in both the countries.

When the PPP is same in both the countries, the people in both the countries will be able to purchase the goods at similar prices. Thus there will be no difference in the prices of the two ...