Tuesday, 25 October 2016

Assumptions, Theories & Purchasing Power Parity Theory

Formal learning in secondary school has shaped my thinking and some of the expressions which I use from time to time.... Thus having studied Principles of Business and Accounting at CXC and Economics and Accounting at Advanced Level GCE some of my fall back concepts are:

Assumptions: Assumptions tend to be related to budgeting and the more defined the assumptions are, the more information is conveyed.  In some things, times or areas, the concepts  may work exceedingly well, while some of the others may not. However the pluses and the minuses may balance out over time or within a period on which we may be reporting or they may be carried forward to another period. The carrying forward to another period may be impacted upon by a person's willingness to commit to transactions for one period or for an extended period.

Many of the things of which we speak  are theories which may have been tested over time and which most likely were documented and reported upon in a university. Economics is one of the studies which is based on theories, put forward by persons who were dealing with changing times and who were attempting to solve or assist in the solution of known challenges. 

Thus the Monetarists' solution to one of the problems of their times may have been to increase or decrease the supply of money in the economy to control inflation at times and to stimulate purchases at other times.   Here is a link to Wikipedia with additional information on Monetarism;

Some of the most creative thinking on Monetarism was publicized by Milton Friedman, an American who was born in 1912 and who would have lived through two World Wars and other changes in society. https://en.wikipedia.org/wiki/Milton_Friedman Thus his "world" may have been influenced by the periods before, during and after the wars and attempting to rejuvenate the economy with an influx of working persons in some periods and with a reduction in the workforce at other times.

Most persons tend to think of Keynesian Economic thinking, as being guided by taxation, indirect or direct to impact on the growth, stability of a nation. According to "Keynesian economics, state intervention was necessary to moderate "boom and bust" cycles of economic activity.[7] Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions." Given that  Keynes was born in 1883 and in England rather than in the USA, it is likely that there may have been a greater reliance on the use of monetary policies, rather than fiscal policies, as fiscal policies tend to be much more difficult to implement given that they require changes to the law, understanding and application of same for them to be seen as being effective rather than punitive to the people.

Purchasing power parity theory: Purchasing power parity theory deals with the ability (power) to purchase an item usually in another  currency which may be located in another country in many instances.  With the advent of online shopping, the exercises which were associated with testing this theory may have been lost. With the recent introduction of the online purchase tax in Trinidad and Tobago, there may be a reintroduction of the physical purchase of items from another country. https://en.wikipedia.org/wiki/Purchasing_power_parity

However in examining the concept of purchasing power parity theory, one would look at the price of the item, compare the cost of the item to what you would pay for a similar item at home and then determine if you would purchase it. If  the comparison of values leads to a determination that it is not economical to purchase the item, then one would tend not to purchase same. 

At times,  one may elect to purchase an item which did not meet the criterion of being economically priced when the purchasing power parity theory was used due to changes in tastes. For example when one is one a diet, one may eat salads, soups, sandwiches and steer away from beef burgers, however attractive the result of the application of the purchasing power parity theory. On the other hand if one is conscientious about consuming vegetables, soups and such daily, then  the more economically priced beef burger may be the favored choice while on vacation.  https://en.wikipedia.org/wiki/John_Maynard_Keynes

Here is a link to a text which may be of use to a student of Economics... http://www.palgraveconnect.com/pc/doifinder/view/10.1057/9780230505803

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