A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Purchasing Power Parity
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| - | A theory which states that the exchange rate between two currencies is in equilibrium when it exactly reflects the price of identical goods and services in the two countries. If an item costs £100 in the UK and $150 for the same item in the U.S. there is purchasing power parity if the exchange rate is £1=$1.5. The item effectively costs the same in both countries. Purchasing power parity cannot apply to immobile goods such as houses and it does not take into account distortions caused by transport costs and trade restraints so standard goods that are widely available in both countries are used as a measure.
| + | Purchasing power parity is the exchange rate that would make the cost of an item the same in two countries. If an item costs £100 in the UK and $150 in the U.S. there is purchasing power parity if the exchange rate is £1=$1.5. The item effectively costs the same in both countries. Purchasing power parity cannot apply to immobile goods such as houses and it does not take into account distortions caused by transport costs and trade restraints so standard goods that are widely available in both countries are used as a measure. Purchasing power parity can be used to suggest the correct level of an exchange rate and whether it is over or under valued. It also permits comparisons to be made between countries' incomes and gross domestic product ([[GDP]]) |
Revision as of 08:27, 6 September 2009
Purchasing power parity is the exchange rate that would make the cost of an item the same in two countries. If an item costs £100 in the UK and $150 in the U.S. there is purchasing power parity if the exchange rate is £1=$1.5. The item effectively costs the same in both countries. Purchasing power parity cannot apply to immobile goods such as houses and it does not take into account distortions caused by transport costs and trade restraints so standard goods that are widely available in both countries are used as a measure. Purchasing power parity can be used to suggest the correct level of an exchange rate and whether it is over or under valued. It also permits comparisons to be made between countries' incomes and gross domestic product (GDP)