Macroeconomics

F I G U R E

5 - 1 3

Percentage  

change in

nominal

exchange  

rate 

35

30

25

20

15

10

5

0

−5

Inflation differential 

Depreciation

relative to 

United States

dollar

Appreciation

relative to 

United States

dollar

−5

−10 5 

0 

10 15 20 25 30 

Canada

Sweden

Australia

South Africa

New Zealand

Japan

Switzerland

Mexico

Singapore

South Korea

Denmark

Norway

Iceland

United Kingdom

Pakistan

did. But, as Figure 5-13 shows, inflation in Switzerland has been lower than infla-

tion in the United States. This means that the value of the franc has fallen less

than the value of the dollar. Therefore, the number of Swiss francs you can buy

with a U.S. dollar has been falling over time. 

■

The Special Case of Purchasing-Power Parity

A famous hypothesis in economics, called the law of one price, states that the same

good cannot sell for different prices in different locations at the same time. If a

bushel of wheat sold for less in New York than in Chicago, it would be prof-

itable to buy wheat in New York and then sell it in Chicago. This profit oppor-

tunity would become quickly apparent to astute arbitrageurs—people who

specialize in “buying low” in one market and “selling high” in another. As the

arbitrageurs took advantage of this opportunity, they would increase the demand

for wheat in New York and increase the supply of wheat in Chicago. Their

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P A R T   I I

Classical Theory: The Economy in the Long Run