Purchasing Power Parity

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."

Sample of Sources Used:

• Neary, J.P. (2004). "Purchasing Power Parity." Prepared for Encyclopedia of World Trade Since 1450, ed. J.J. McCusker et al., New York: Macmillan Reference. Retrieved on February 29, 2008 from http://www.ucd.ie/economics/staff/pneary/pdf/ppp.pdf
• "Purchasing Power Parity" (n.d.) The University of British Columbia. Retrieved on February 29, 2008 from http://fx.sauder.ubc.ca/PPP.html
• "Purchasing Power Parities (PPP): Frequently Asked Questions." (2007). OECD: Statistics Directorate. Retrieved on February 29, 2008 from http://www.oecd.org/faq/0,3433,en_2649_34357_1799281_1_1_1_1,00.html
• Reddy, S.G. and Pogge, T.W (2005). "How not to Count the Poor." Columbia University. Retrieved on February 29, 2008 from http://www.columbia.edu/~sr793/count.pdf
• Suranovic, S.M. (2006). "International Finance Theory and Policy." Chapter 30: Introduction to Purchasing Power Parity. Retrieved on February 29, 2008 from http://internationalecon.com/Finance/Fch30/F30-1.php

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"

APA Citation:

MLA Citation: