So I was looking up per capita income by country lists and there were ppp and nominal lists...each with different $ and ranking. Whats the difference between nominal and ppp? What do nominal and ppp per capital income mean?
PPP or Purchasing Power Parity is the relative value of money or currency and usually is tied to world market. How many $ it takes to purchase other currency. It reflects the economy of the market place. Nominal is the market value of all goods.
:computer: :leaving: ...just joking. Those two led me to: The law of one price (LOP) is an economic concept which posits that "a good must sell for the same price in all locations". The law of one price constitutes the basis of the theory of purchasing power parity and is derived from the no arbitrage assumption. Rational pricing is the assumption in financial economics that asset prices (and hence asset pricing models) will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. f the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium or arbitrage-free market. An arbitrage equilibrium is a precondition for a general economic equilibrium. The assumption that there is no arbitrage is used in quantitative finance to calculate a unique risk neutral price for derivatives. Arbitrage is possible when one of three conditions is met: The same asset does not trade at the same price on all markets ("the law of one price"). Two assets with identical cash flows do not trade at the same price. An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate (or, the asset does not have negligible costs of storage; as such, for example, this condition holds for grain but not for securities). Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally possible only with securities and financial products that can be traded electronically, and even then, when each leg of the trade is executed the prices in the market may have moved. Missing one of the legs of the trade (and subsequently having to trade it soon after at a worse price) is called 'execution risk' or more specifically 'leg risk'.[note 1] In the simplest example, any good sold in one market should sell for the same price in another. Traders may, for example, find that the price of wheat is lower in agricultural regions than in cities, purchase the good, and transport it to another region to sell at a higher price. This type of price arbitrage is the most common, but this simple example ignores the cost of transport, storage, risk, and other factors. "True" arbitrage requires that there be no market risk involved. Where securities are traded on more than one exchange, arbitrage occurs by simultaneously buying in one and selling on the other. See rational pricing, particularly arbitrage mechanics, for further discussion. Mathematically it is defined as follows: P(V_t \geq 0) = 1 \text{ and } P(V_t \neq 0) > 0 \, where V_0 = 0 and V_t denotes the portfolio value at time t. I knew there was a reason I don't do numbers :dizzy2:
