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The exchange rate of a country is dependent on the monetary authority, which can help in managing the currencies in the foreign exchange rate. Purchasing power parity between the UK has the US has been provided in this essay for managing the exchange rates in the financial market.
PPP (Purchasing power parity) is an exchange rate determination that is managed through the economic theory. The currencies of different countries ate compared using PPP. This helps in finding the price levels of the products among the countries. “The goods that are available in one country will cost the same in another country even after exchanging the currency (Eleftheriou and Müller-Plantenberg, 2018)”. PPP reduces the power of the currency and affects the countries that have low income. “The equal price levels among the country reduce discrepancies by which the import and export of the international trade become easier (Zayed et al. 2018)”. The real value of the products also is decreased with the involvement of the PPP among the countries. The opportunities for arbitrage are used using the forward contacts in PPP for maintain the purchasing products easily. “Free-floating are also involved in the UK for managing the demand changes in the market supply (FlassbEck, 2018)”. US have 1.0 PPP when it is calculated as per the GDP of the country. This is an economic theory that is also used for managing economic health of the countries over the world. There are two types of PPP such as absolute parity and relative parity. Absolute parity help is managing the values of the products same in different countries. However, relative parity is based on the real purchasing power of the currency in the country.
PPP is mostly calculated based on the popular metric that is used by macroeconomic analysts. This helps in comparing the currencies of different countries by a basket of goods approach. The comparisons between the economic productivity and living standards among the countries are managed with PPP. “Low-income countries have low wages that has helped in maintain the power of purchasing in the general countries with high PPP (Bulman et al. 2017)”. Moreover, PPP is dependent on the exchange rates of the countries by which the business market are managed. In exchange rates the involvement of the automatic adjustments are required to be managed by which the overflow of the currency in the country be maintained properly. “This helps in maintain the PPP of the countries by which the business profits in the market can be managed with the exchange rates of the goods (Li and Love, 2022)”. The PPP is measured with the cost of goods in both countries using the spot exchange rates. This is calculated by dividing the cost of good in one country currency by the cost of good in other country currencies maintain US dollar unit. “It has been found that from 2016 the PPP was 0.689, 2017 it was, 0.685, and 2018 was 0.688, 2019 was 0.687 and in 2020 ir was 0.688 (OCED, 2021)”. From, the PPP of last five years was fluctuating in nature with the variance of 0.1 values.
The relationship between the GDP and PPP is based on the common metrics where the GDP is calculated as per the values of services and goods produced in the country. This has helped on managing the nominal GDP that is required to be developed for the PPP of the country. The exchange rate does not look for the living situations. However, it is dependent on the values of the goods in the country. The involvement of PPP between two countries helps in maintain the international relationships among the country without any conflict. “The advantages of maintaining speculative attacks in the UK are developed through the involvement of the fixed exchange rates in the UK (Höpner and Spielau, 2018)”. The PPP between UK and US is 0.7 as per the GDP of the UK. The conversion is made with US dollars. The exchange rate of the good price is managed with fluctuating PPP with a decreasing order from 2001-2020. The inflation rate in the UK is 1% and the GDP deflator s 114.3 indexes. “The indicator in the UK is calculated as per dollar (Milanovic, 2020)”. This has helped in managing the currency conversion rates for equalising the PPP between the two countries. The involvement of the same process of the products across the countries has helped investors to invest their liability or assets by managing proper decisions [Refer to appendix].
It can be concluded that the involvement of financial conditions with PPP is required to be managed with the values of the products in the country. The PPP among the UK and US varies with 0.7, which is calculated based on national currency US dollar in the financial system.
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