What is purchasing power parity? Why might exchange rates deviate from purchasing power parity?

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Jarrod RobelLv2

14 Jul 2018

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Explain the basic difference between the exchange rate method and the purchasing power parity method of measuring national income, and explain the motivation for using the purchasing power parity method. Why do purchasing power parity measureas of income tend to show a smaller difference between low-income and high-income countries than other measures of income?

________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

A) The Fisher Effect

B) The International Fisher Effect

C) Absolute Purchasing Power Parity

D) Relative Purchasing Power Parity

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Critically discuss in your own words the theory of Purchasing Power Parity (PPP), noting the difference between absolute purchasing power parity, relative purchasing power parity. As part of your discussion state whether PPP is useful in practice and why, drawing on your understanding of the Big Mac Index.

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What is purchasing power parity? Why might exchange rates deviate from purchasing power parity?

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