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Reexamination of the Purchasing Power Parity (PPP) under Cournot Competition

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  • Dai, Meixing

Abstract

This paper reexamines the Purchasing Power Parity (PPP) in an open economy macroeconomic model with Cournot competition in the international trade of a unique good. Foreign and domestic firms have a Cournot perception of foreign and domestic markets and make separate quantity decisions for each market taking the quantity decisions of the other firm as given. In introducing the money, the balance of payments relation and the nominal exchange rate, the PPP implied by the law of one price can be reexamined. We show that the imperfect competition and symetric trade barriers are not enough to break the absolute and relative PPP. But under symmetric trade barriers, asymmetric policy and macroeconomic conditions are sufficient for the absolute PPP not to hold, while asymmetric trade barriers are enough to break it. These results are developed without calling on the role of non-tradable goods, shifts in the consumers’ tastes or technological changes, which are commonly considered as the principal factors to break the absolute and relative PPP. Conditions under which the relative PPP is not verified are discussed.

Suggested Citation

  • Dai, Meixing, 1995. "Reexamination of the Purchasing Power Parity (PPP) under Cournot Competition," MPRA Paper 13906, University Library of Munich, Germany, revised Oct 1995.
    • Handle: RePEc:pra:mprapa:13906
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    References listed on IDEAS

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    1. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
    2. Fender, John & Yip, Chong K., 1994. "Open economy macroeconomics under imperfect competition A two-country model," Journal of International Economics, Elsevier, vol. 37(1-2), pages 49-63, August.
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    Cited by:

    1. Dai, Meixing, 1995. "The Nominal Exchange Rate Implication of VAT Harmonization in EEC," MPRA Paper 13860, University Library of Munich, Germany, revised Jun 1996.

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    More about this item

    Keywords

    Purchasing Power Parity (PPP); Cournot perception firms;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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