Purchasing Power Parity

Paper Summary:

This paper explains that the theory of purchasing power parity (PPP) means that, in an ideal world with an efficient market, the same goods should have the same price universally. The author points out that the PPP, which is loosely explained as the Big Mac index, also means that a consumer good sold in practically every part of the world, takes the place of the commodity basket; therefore, a Big Mac being sold in the United States must have the same price as Big Mac sold in Australia. The paper relates that recent data cannot fully support the theory of the purchasing power parity and the law of one price because, in the real world, there are trade barriers, free competition and differences in price levels in different countries, which create difficulty in testing the PPP through government-published price indexes.

From the Paper:

"The proper estimation of purchasing power parity is made difficult because there is no uniform price level. Also, different people in different countries have varying commodity baskets, which also make the scenario more complicated. Add to this the factor of the varying availability of different goods in certain countries, and the fact that there aren't just two countries that come into play in the economic world."

Sample of Sources Used:

• Krugman, P. & Obstfeld, M. (2000) International economics: Theory and policy. United States of America, Addison-Wesley Publishing Company.
• Wikipedia. (2001) Big Mac index. Retrieved March 3, 2007, from http://en.wikipedia.org/wiki/Big_Mac_index.
• Wikipedia. (2001) Purchasing power parity. Retrieved March 3, 2007, from http://en.wikipedia.org/wiki/Purchasing_power_parity.

More papers on Purchasing Power Parity:

• Analytical Essay # 142139 : "Purchasing Power Parity"
• Analytical Essay # 133374 : "Purchasing Power Parity"
• Term Paper # 120837 : "Purchasing Power Parity and Global Finance"
• Term Paper # 110947 : "Purchasing Power Parity"

APA Citation:

MLA Citation: