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The Way the World Works is Purchase Power Parity

The way the world works is purchase power. In America, one ton of copper will cost about $8119.30 plus shipping costs. The exchange rate determines the number of units in another currency that a dollar will buy. For example, one euro will cost $1.23, so a ton of copper would cost 6601.03 euros. If the exchange rate and the purchases power parity are the same, then a basket of goods costs the same in purchasing power in both countries. If a ton of copper costs 6594.97 euros, then the purchasing power differs. Euros are stronger than dollars in purchase power. The dollar does not have a consistent value in relationship to the other currencies like the euro, yen, and pound. When a currency appreciates against another currency, it means that imports get cheaper. For example, it takes fewer dollars to buy more import goods. Traveling abroad using dollars means foreign travel costs are less.

When purchase power parity moves away from exchange rates, it means inflation is occurring in the country with less purchasing power. Strong currencies' countries import more goods from weaker currencies' countries. Emerging markets receive hot money to fuel their economies. The rapid growth due to industry, cheap labor and demand for export goods heats up the merging market economies. Jobs are more plentiful.

The exchange rate between two countries should match the price levels between two countries: e=p1/p2. President Trump claims unfair trade and currency exchanges have given China an unfair advantage. In 2018, one yuan exchanges for 15.77 cents. The Peoples Bank of China central bank sets the exchange rate of the yuan or Rembmini every morning. In 2005, the Rembmini was allowed to fluctuate two-percent in price against a basket of currencies. PBoC buys and sells the Rembmini to keep it pegged with the dollar. Some currencies are allowed to float against other currencies on the market, and their governments do not buy and sell the currency. The claim of unfair trade practices occurs when countries with cheaper currencies experience increased exports. In 2016, a dollar bought 6.5 yuan; however, the purchase power parity (PPP) was 5.7 RMB per dollar. The dollar was stronger against the yuan but bought less goods and services in China because of PPP. The Rembmini was 14-percent undervalued. The yuan appreciated 36% from 2005 to 2015. Chinese imports were becoming more expensive. Manufacturers began relocating from China to Vietnam, Indonesia and Africa.

President Trump said a 45-percent tariff on Chinese imports would be necessary to stop this unfair trade practice. China said it would not engage in significant exchange rate reforms. Trump does not like China's strong intervention in the currency markets and China's growing trade surplus. China is fighting its label as a currency manipulator. The loss of factories and jobs to foreign competition is a big concern.

Purchase power parity shows the ratio of prices in national currencies for the same good or service. Purchase power parity accounts for differences in inflation and pricing in different countries. The PPP adjusts to get one price for the commodity or service amongst all countries. Tarrifs, taxes and transportation costs affect the cost of the commodity. Purchase Power Parity gives insight into the overvaluation or undervaluation of a currency.

In 2007, purchase power parity was stronger in India and China; therefore, they contribute more to global growth than the United Kingdom, Japan and the U.S. In 2018, China consumers are beginning to consume and invest. In the past, sovereign wealth funds have helped emerging markets grow. China is helping grow emerging markets. As more emerging markets come online, the global economy grows. Over time, the emerging markets will shift from exports to consumables.

Trump's tariffs on Chinese steel and aluminum will slow emerging market growth. Trump's duties were 25-percent on steel and 10-percent on aluminum. Countries most affected by the import tariff are Brazil, South Korea and China. South Korea is the third largest exporter of steel to the U.S. China exports aluminum to the U.S.

increased exports. In 2016, a dollar bought 6.5 yuan; however, the purchase power parity (PPP) was 5.7 RMB per dollar. The dollar was stronger against the yuan but bought less goods and services in China because of PPP. The Rembmini was 14-percent undervalued. The yuan appreciated 36% from 2005 to 2015. Chinese imports were becoming more expensive. Manufacturers began relocating from China to Vietnam, Indonesia and Africa.

President Trump said a 45-percent tariff on Chinese imports would be necessary to stop this unfair trade practice. China said it would not engage in significant exchange rate reforms. Trump does not like China's strong intervention in the currency markets and China's growing trade surplus. China is fighting its label as a currency manipulator. The loss of factories and jobs to foreign competition is a big concern.

Purchase power parity shows the ratio of prices in national currencies for the same good or service. Purchase power parity accounts for differences in inflation and pricing in different countries. The PPP adjusts to get one price for the commodity or service amongst all countries. Tarrifs, taxes and transportation costs affect the cost of the commodity. Purchase Power Parity gives insight into the overvaluation or undervaluation of a currency.

In 2007, purchase power parity was stronger in India and China; therefore, they contribute more to global growth than the United Kingdom, Japan and the U.S. In 2018, China consumers are beginning to consume and invest. In the past, sovereign wealth funds have helped emerging markets grow. China is helping grow emerging markets. As more emerging markets come online, the global economy grows. Over time, the emerging markets will shift from exports to consumables.

Trump's tariffs on Chinese steel and aluminum will slow emerging market growth. Trump's duties were 25-percent on steel and 10-percent on aluminum. Countries most affected by the import tariff are Brazil, South Korea and China. South Korea is the third largest exporter of steel to the U.S. China exports aluminum to the U.S.

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