This paper offers an overview of the concept of purchasing power parity.
Written in 2008; 1,851 words; 5 sources; APA; $ 59.95
Paper Summary:
The paper explores the background of the theory of purchasing power parity and examines the theory's effects on prices and businesses, its usefulness and its limitations.
Outline:
Background of the Development of the Theory
PPP as an Extension of the 'Law of One Price'
Relative PPP
Usefulness of the PPP Theory
Limitations of the PPP Theory
Conclusion
From the Paper:
"Purchasing power parity (PPP) theory states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. It is based on the concept that identical goods in an efficient market must have the same price when measured in a common currency. Proponents of the theory believe that comparison of the market exchange rates of currencies of various countries and comparison with their PPP exchange rates are a reflection of their over or under-valuation. Moreover, GDP per capita based on PPP provides a more accurate method of comparing the standard of living in different countries than the conventional GDP per capita (nominal) based on the market exchange rate since the prices of a number of goods and services vary widely between countries at the market exchange rates."
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