Market power and purchasing power parity : a general equilibrium model

In this thesis, the effect of market power on exchange rate is analyzed in a general equilibrium Lucas’s tree type model. The basic hypothesis that explains the level of the exchange rate is the Purchasing Power Parity (PPP), which predicts that money has the same purchasing power in each country. Research on exchange rates and goods prices has moved to an examination of the importance of imperfect competition in international markets. In the field of international economics, models of imperfect competition have been proposed to explain the response of import and import-competing prices to exchange rate changes. In this study imperfectly competitive relation between foreign and domestic firms is investigated under market power. Our theoretical analysis defines and measures the effects of market power on export and import prices and their relative amounts. Our results indicate that market power affects the composition of a country’s consumption in terms of import and domestically produced goods because of the effect on the prices at home and abroad.