Dialogues, rather than academic talks, mostly use this type. The prompt generally asks why one speaker visits the other speaker. So you need to be able to understand why the dialogue, what its purpose is, is happening. You’re looking for the overall reason for the talk, instead of any detail.
Example: Transcript of the passage you would HEAR:
Narrator: Listen to a conversation between a student and a teacher.
Student: Hello Professor, I made an appointment to see you today at 3:00 p.m…?
Professor: Yes… Benjamin? You’re right on time. Come in, have a seat. Are you here about next week’s test?
Student: Yes, there’s just one point that I’m still a little stuck on… and I was hoping I could go over it with you.
Professor: Of course… I always try to make time to help out students in your situation.
Student: Well, I’ve been reviewing the main economic concepts you discussed in class, but I’m still confused as to the difference between « foreign exchange rates » and « Purchasing Power Parity. » You know… PPP.
Professor: I see. Well, let’s try to narrow down the area where you’re lost.
Student: You said that PPP is in some ways a more accurate measure of a currency’s real value than exchange rates are, and that economists have an increasing interest in it. But… why is that really so? I mean… you said that foreign exchange rates are the more traditional measure of a currency’s value. So why are some economists using PPP?
Professor: One reason that some economists prefer using it is because PPP is a better measurement of money as a store of value. The foreign exchange rate, obviously, may be better suited to measure money as an item of trade.
Student: Sorry, I don’t understand.
Professor: Okay, let’s separate the concepts and go over them one by one. Let’s start with the more familiar concept: the foreign exchange rate. If I open today’s paper and see that 1 Euro is selling for 1.5 dollars in today’s foreign exchange markets, what does that mean?
Student: I could sell 1 Euro in a foreign exchange market, and get 1.5 dollars back?
Professor: Right. Now, PPP is a different measure of value, though. Do you remember what I said in class about how we can use it?
Student: You said that by using PPP we can measure a currency by a basket of goods or services that it will buy domestically.
Professor: You’re catching on: a simple item… such as a hamburger, will illustrate this point. Imagine that it takes 3 Euros to purchase a hamburger in France, but only 1 dollar to purchase that same hamburger in the United States.
Student: I get it! So, in that situation the dollar would be weaker than the Euro in foreign exchange markets, but stronger in PPP terms! I could buy more goods and services in the USA with dollars than a European could purchase in Europe with Euros.
Professor: Assuming that what held for the hamburger would also hold for a range of goods and services in both countries, then the answer would be yes. However, PPP also has a number of problems that I mentioned. Do you remember any of them?
Student: I remember you said… that it might depend on which sorts of goods and services are included in the basket used to measure PPP.
Professor: Yes, and that’s crucial. Things like housing, food and clothing are all items that would definitely be included in any measure of PPP. Beyond these kinds of essentials, however, what should or should not be included in PPP is not clear. Should… for example, education be included? Vacations?
Student: I see. That’s why you said that foreign exchange rates are much more conceptually clearer… and practical, in terms of trade.
Professor: Correct. Foreign exchange rates are much easier to set in a market. Global currency traders post their « ask » and « bids » in currency markets, and these markets instantly transmit this information around the world.
Student: Then it sounds as if PPP is more a sort of… abstract economic term, then. I suppose for real currency traders working in currency markets, PPP isn’t of much use.
Professor: Not necessarily. Even traders may keep in mind PPP as an indicator of a country’s fundamental economic conditions and growth prospects.
Student: You mean even foreign exchange traders might take PPP into account when making their bid and ask decisions?
Professor: Sure! Let’s take currencies of two large emerging economies: China and India. You won’t get many dollars for Chinese Renminbi or Indian Rupees. However, it’s undeniable that as both countries have experienced strong economic growth over the last decades, their respective currencies also buy more domestically. PPP has grown rapidly in both countries. This is despite the fact that neither currency has gained much against the dollar in foreign exchange markets over that same period.
Student: Okay, I get it. Thank-you for clarifying PPP to me.