3.4. TRANSLATING FC FIGURES: NOMINAL RATES, PPP RATES, AND DEVIATIONS
FROM PPP 109
Figure 3.16:Real rates based on Big-Mac prices fromThe Economist0.0000.5001.0001.5002.0002.500ChinaMacauMalaysiaHong KongIndonesiaPhilippinesParaguayEgyptUkraineMoldavaUruguayRussiaDominican RepSri LankaHondurasBulgariaSlovakiaPolandThailandSouth AfricaPakistanVenezuelaCosta RicaJapanSingaporeGuatemalaArgentinaGeorgiaTaiwanEstoniaSaudi ArabiaLithuaniaAustraliaUAELatviaMexicoColombiaCroatiaSouth KoreaCzechFijuHungaryTurkeyNew ZealandSloveniaArubaBrazilMoroccoPeruChileUnited statesCanadaBritainEurolandSwedenDenmarkSwitzerlandIcelandNorwaytranslated price level (US=1)SourceBased on data fromThe Economist, May 26, 2006
3.4.4 The Change in the Real Rate and (deviations from) RelativePPP
PPPFor most of the time since the 80s, Japan has had a real rate above unity: it was a
more expensive place to spend a dollar than theusor Europe. Sometimes one would
be interested in whether the country’s situation has worsened or improved. That
is, has the real rate increased or decreased (as distinct from the issue of whether its
level is above unity or not)?
To measure this, one can simply compute the RER’s percentage change. Not
surprisingly, the percentage change in theRERis determined by the percentage
changes in the spot rate and the price levels—the inflation rates:
Example 3.17
Q. Suppose that 5 years ago thefdktraded atusd/fdk0.012, and the price levels
wereusd4 in theusandfdk250 abroad. (So, with current price levels being 5
and 250, respectively, inflation was 25 percent in theus, and zero in Freedonia.)
Recalling that the currentRERis 250× 0. 010 /5 = 0.5, how much did theRERchange
since then?
A. The oldRERwas 250× 0. 012 /4 = 0.75 ; so the rate changed by (0. 50 − 0 .75)/ 0 .75 =
− 0 .33, that is, minus 33 percent. There was real depreciation of the Crown—that
is, Freedonia became cheaper over time—because thefdkwent downandbecause