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Chapter 29: Q.18 (page 716)

What is the purchasing power parity exchange rate?

Short Answer

Expert verified

Purchasing Power Parity (PPP) is a principle that claims that all currency exchange rates are equal and that all nations have the same buying power.

Step by step solution

01

Concept of Purchasing Power Parity:

Purchasing Power Parity (PPP) is a concept that states that exchange rates across currency are all in balance and that countries have the same purchasing power. This means that as the cost of goods and services rises (inflation), the exchange rate falls in order to revert to PPP.

02

Explanation of final answer.

The buying power equivalency transfer rate is the rate that levels the prices of products and services in various countries. The PPP exchange rate serves two purposes. It is used for two purposes: first, for comparing GDP, and second, for other economic figures. By conducting thorough examinations of commodities traded globally, the World Bank's international comparison program produces the PPP exchange rate for all countries.

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Most popular questions from this chapter

If a country鈥檚 currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the interest rate

paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect a currency's demand and supply.

Do you think that a country experiencing

hyperinflation is more or less likely to have an exchange rate equal to its purchasing power parity value when compared to a country with a low inflation rate?

Does a higher inflation rate in an economy, other things being equal, affect the exchange rate of its currency? If so, how?

What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?

Can you think of any major disadvantages to dollarization? How would a central bank work in a country that has dollarized?
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