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Purchasing Power Parities (PPPs).
Member rating: No Rating | Words: | Submitted: Mon Dec 22 2003
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1.1 The Foundation of PPP Purchasing Power Parities (PPPs) describe the relationship between the prices of goods and services and exchange rate. They are currency conversion rates that both convert to a common currency and equalize the purchasing power of different currencies. PPPs are based on the Law of One Price. This law simply states that in the presence of a competitive market structure and the absence of transport costs and other barriers to trade, identical products, which are sold in different markets, will sell at the same price when expressed in terms of a common currency. On the basis of the law of one price theory, economists develop two versions of PPPs: absolute PPP and relative PPP. 1.2 Absolute PPP The absolute PPP can be expressed: the price of a market basket of home country goods equals the price of a market basket of foreign goods when multiplied by the exchange...
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