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A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity

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Abstract

We develop a classroom experiment on exchange rate determination appropriate for undergraduate courses in macroeconomics and international economics. Students represent citizens from different countries and need to obtain currency to purchase goods. By participating in a sealed bid auction to buy currency, students gain a better understanding of currency markets and the determination of exchange rates. The implicit framework for exchange rate determination is one in which prices are perfectly flexible (in the long run) so that purchasing power parity (PPP) prevails. Additional treatments allow students to examine the impact of transport costs, nontradable goods and tariffs on the exchange rate and to explore possible deviations from PPP.

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  • Mitchell, David & Rebelein, Robert P. & Schneider, Patricia & Simpson, Nicole B. & Eric Fisher, "undated". "A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity," Vassar College Department of Economics Working Paper Series 87, Vassar College Department of Economics.
    • Handle: RePEc:vas:papers:87
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    1. Denise Hazlett, 2003. "A Search-Theoretic Classroom Experiment with Money," International Review of Economic Education, Economics Network, University of Bristol, vol. 2(1), pages 80-90.
    2. Lisa R. Anderson & Sarah L. Stafford, 2006. "Does Crime Pay? A Classroom Demonstration of Monitoring and Enforcement," Southern Economic Journal, John Wiley & Sons, vol. 72(4), pages 1016-1025, April.
    3. Denise Hazlett & Cynthia D. Hill, 2003. "Calculating the Candy Price Index: A Classroom Inflation Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 34(3), pages 214-223, January.
    4. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    5. repec:bla:jecsur:v:15:y:2001:i:2:p:221-36 is not listed on IDEAS
    6. Denise Hazlett & Joshua Wookey, 2003. "The Effects of Real vs. Nominal Interest Rates on Investment: A Classroom Exercise," Journal of Economic Insight, Missouri Valley Economic Association, vol. 29(1), pages 109-122.
    7. Denise Hazlett & Jeela Ganje, 1999. "An Experiment with Official and Parallel Foreign Exchange Markets in a Developing Country," The Journal of Economic Education, Taylor & Francis Journals, vol. 30(4), pages 392-401, December.
    8. Denise Hazlett, 2004. "A Classroom Unemployment Compensation Experiment," Southern Economic Journal, John Wiley & Sons, vol. 70(3), pages 694-704, January.
    9. Charles A. Holt, 1999. "Teaching Economics with Classroom Experiments: A Symposium," Southern Economic Journal, John Wiley & Sons, vol. 65(3), pages 603-610, January.
    10. Bradley T. Ewing & Jamie B. Kruse & Mark A. Thompson, 2004. "Money Demand and Risk: A Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 35(3), pages 243-250, July.
    11. Michael J. Haupert, 1996. "An Experiment in Comparative Advantage," The Journal of Economic Education, Taylor & Francis Journals, vol. 27(1), pages 37-44, January.
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    Cited by:

    1. Paul Johnson, 2018. "Exchange Rates: An Asynchronous Classroom Experiment," Journal of Economics Teaching, Journal of Economics Teaching, vol. 3(2), pages 206-217, December.
    2. Jannett Highfill & Raymond Wojcikewych, 2011. "The U.S.-China Exchange Rate Debate: Using Currency Offer Curves," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(4), pages 386-396, November.
    3. KimMarie McGoldrick, 2010. "Advancing the Scholarship of Teaching and Learning in Economics," Chapters, in: Michael K. Salemi & William B. Walstad (ed.), Teaching Innovations in Economics, chapter 3, Edward Elgar Publishing.
    4. repec:kap:iaecre:v:17:y:2011:i:4:p:386-396 is not listed on IDEAS
    5. Mitchell, David & Hunsader, Kenneth & Parker, Scott, 2011. "A Futures Trading Experiment: An Active Classroom Approach to Learning," MPRA Paper 56496, University Library of Munich, Germany, revised 2011.

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