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Factors of Relative Prices of Product - Report

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Added on  2020-05-28

Factors of Relative Prices of Product - Report

   Added on 2020-05-28

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Running head: INTERNATIONAL FINANCEINTERNATIONAL FINANCEName of the StudentName of the StudentAuthor’s Note
Factors of Relative Prices of Product - Report_1
1INTERNATIONAL FINANCETable of ContentsIntroduction.....................................................................................................................................2Discussion........................................................................................................................................2Main factors affecting relative prices of products.......................................................................2Effect that induce changes in exchange rate and deviations from purchasing power parity.....3Correlation between exchange rate and terms of trade.............................................................4Government intervention in foreign exchange (FX) market operations.....................................5Conclusion........................................................................................................................................6References.......................................................................................................................................7
Factors of Relative Prices of Product - Report_2
2INTERNATIONAL FINANCEIntroductionThis report gives an overview about the vital factors that affects the relative prices ofproducts. Relative prices of goods refer to the ratio between price of a specific good and theweighted average of other products that are available in the marketplace. If the prices of thosespecific good increases by 2% while other products decreases, then relative prices of productsincreases without affecting the purchasing power parity (Melvin and Norrbin 2017). A vital partof the difference in price of goods between the nations is terms of trade, compression of wage,variation in exchange rate etc. The study also focuses on how this effect on relative price ofgoods induces variation in exchange rate and deviations in purchasing power parity (PPP).Volatility in relative price and exchange rate can be generated from the two sources thatinclude- domestic price as well as dollar value and imported price or currency value. Thecorrelation between the exchange rate and terms of trade (TOT) are also analyzed in this study.Furthermore, the government intervention engaging in operations of foreign exchange marketand its impact on TOT is also illustrated in this study. DiscussionMain factors affecting relative prices of products Some of the vital factors that affects the relative prices of products are exchange rate,terms of trade, purchasing power parity etc. Movements in the exchange rate changes therelative prices if products and services. This means that if the exchange rate declines, therelative prices of local commodities and services also declines but relative prices ofinternational products and services rises. However, this fluctuation in relative price leads toincrease in the nation’s exports and decline in its imports. On the other hand, increase inexchange rate leads to increase in relative price of products as well as services while it leads todecline in relative price of international commodities and services (Reisman 2013). Moreover,this variation in relative price leads to decline in exports and rise in imports. In addition, therelative prices between the two countries can also be recapitulated by means of PPP. PPPdefines that the exchange rate between the nations is equivalent to the ratio of currencies with
Factors of Relative Prices of Product - Report_3

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