TRAMES 4, 5, 2001


Nicholas W. Balabkins and Frank R. Gunter

Lehigh University

Abstract. Article opens with a discussion of Cassel's purchasing power parity (PPP) analysis and the difficulties of estimating absolute PPP for developing countries. Then the PPP value of the year 2000 Lat as well as the currencies of Estonia and Lithuania are estimated using The Economist "Big Mac" Index. The Lat is found to be approximately 31% undervalued compared to the U.S. dollar. Capital flight and several other causes of the apparent undervaluation of the Lat are considered. The impact of this undervaluation on the components of the Latvian balance of payments and economic growth is discussed.

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