Purchasing Power Parity (PPP)
Purchasing Power Parity (PPP) is an economic theory that states that the exchange rate between two currencies is equal to the ratio of the two countries’ price levels. This theory is used to compare the cost of living between countries and to measure the relative value of different currencies. It is also used to compare the relative purchasing power of different currencies. PPP is based on the idea that a unit of currency should be able to buy the same amount of goods and services in different countries.
History of Purchasing Power Parity
The concept of Purchasing Power Parity was first proposed by Swedish economist Gustav Cassel in 1918. Cassel argued that the exchange rate between two currencies should be equal to the ratio of the two countries’ price levels. This theory was later refined by economist Irving Fisher in the 1920s. Fisher argued that the exchange rate between two currencies should be equal to the ratio of the two countries’ price levels, adjusted for the cost of transportation and other costs associated with trading between countries.
In the 1950s, economist Robert Mundell further refined the concept of Purchasing Power Parity. Mundell argued that the exchange rate between two currencies should be equal to the ratio of the two countries’ price levels, adjusted for the cost of transportation, other costs associated with trading between countries, and the rate of inflation in each country.
Comparison Table
| Country | Price Level | Exchange Rate |
|---|---|---|
| United States | 100 | 1.00 |
| Japan | 120 | 1.20 |
Summary
Purchasing Power Parity (PPP) is an economic theory that states that the exchange rate between two currencies is equal to the ratio of the two countries’ price levels. This theory is used to compare the cost of living between countries and to measure the relative value of different currencies. It is also used to compare the relative purchasing power of different currencies. PPP is based on the idea that a unit of currency should be able to buy the same amount of goods and services in different countries. For more information about Purchasing Power Parity, please visit the websites of the International Monetary Fund, the World Bank, and the United Nations.
See Also
- Exchange Rate
- Inflation
- Cost of Living
- Gross Domestic Product (GDP)
- Real Exchange Rate
- Real Interest Rate
- Money Supply
- Balance of Payments
- International Trade
- Foreign Exchange Market
