Purchasing Power Parity Between Mexico And Uk

Extended Essay






Economics











Do the Exchange Rates, from June to September 2007, between the Mexican Peso (MXN) and the Pound Sterling (GBP); correspond to what is postulated by the Relative Purchasing-Power Parity?











Fernando Aguilar Islas


IB08








Word Count:


3,846Acknowledgements





I would like to thank my economics teacher and supervisor, Kevin Ryce, who helped me throughout the development of this essay. And I would also like to thank the people who agreed to take part in my survey.

Abstract




Throughout this essay, I attempted to answer the following question: Do the exchange rates, from June to September 2007,between the Mexican Peso (MXN) and the Pound Sterling (GBP); correspond to what is postulated by the Relative Purchasing-Power Parity Theory?


I outlined and explained the procedure used in order to gather my primary data. Then, using my primary data, I calculate inflation for Mexico and the UK. After that, exchange rates were defined and the factors which influence the exchange rateswere mentioned and explained. The possible effects of the inflation rates from both countries, Mexico and the UK, over the exchange rate were analyzed in more detail. The purchasing-power parity theory with its two versions, relative PPP and absolute PPP, were defined. Finally, both currencies, the Mexican Peso (MXN) and the Pound Sterling (GBP) were tested according to the relative PPP theory. Adetailed evaluation about the procedure has been made, in order to identify possible failures that may lead to an inaccurate approach to the theory. In conclusion, neither currencies corresponded to the relative PPP theory nor tended towards it. However, this could be because this version of the PPP tends to overvalue the currency of a developed country and undervalue that of a developing one.Words: 209





Contents




1. Introduction……………………………………………………………………….....5

2. Methodology Applied……………………………………………………………….5

3. Prices and Inflation in Mexico………………………………………………….….7

4. Prices and Inflation in the UK…………………………………………………….10

5. Exchange Rates in Mexico and the UK…………………………………………12

6. The Purchasing-Power Parity (PPP) Theory………………………………..….14

6.1 TheMexican Peso (MXN) and the Relative PPP Theory……………15

6.2 The Pound Sterling (GBP) and the Relative PPP Theory…………...15

7. Conclusion and Evaluation……………………………………………………….16


Bibliography…………………………………………………………………………..19

Appendix A. Pro Forma Questionnaire for the UK……………………………..…20

Appendix B. Pro Forma Questionnaire for Mexico……………………………….21

Appendix C. Physical and VirtualAddresses of the stores………………………22



Table 1. Average Prices in Mexico…………………………………………….........8
Table 2. Categories as a Proportion of Total Spending in Mexico……………….8
Table 3. Mexico’s Inflation Rate……………………………………………………...9
Table 4. Average Prices in the UK…………………………………………………10
Table 5. Categories as a Proportion of Total Spending in the UK………………10
Table 6. UK’s InflationRate…………………………………………………………11


Figure 1. Exchange Rate Equilibrium………………………………………………12
Figure 2. Depreciation of the Mexican Peso (MXN)…………………………...…12
Figure 3. Appreciation of the Mexican Peso (MXN)………………………………12
Figure 4. Depreciation of the Pound Sterling (GBP)……………………………..13


Graph 1. Actual and PPP Exchange Rate of the Mexican Peso (MXN)……….15
Graph 2. Actual and PPP Exchange Rate of the Pound Sterling (GBP)……….161. Introduction


In this essay, I will attempt to answer the following question: Do the exchange rates, from June to September 2007, between the Mexican Peso (MXN) and the Pound Sterling (GBP); correspond to what is postulated by the Relative Purchasing-Power Parity Theory?

In brief, by finding out prices in both countries, I will examine whether there...