Purchasing Power Parity

Published: May 19, 2009

At long time intervals, with, again, ceteris paribus, the exchange rate should reflect purchasing power parity. In other words, there must be a situation in which the conversion of one currency to another did not cause a change in purchasing power. This is obvious, because otherwise everything would be rushed to convert their savings into the currency in which the purchasing power of more. In other words, if a certain standard set (basket) of consumer goods and services worth in 1000 U.S. dollars, and the same set in Russia -50 OOO rubles, the rate should be equal to 50 rubles per dollar. The difficulty is that the concept of purchasing power parity does not have high accuracy, it depends on the structure of the basket, from the conditions of production of goods and services (cost varies and is not always possible to accurately place one type of goods in one country in a similar type of product line to another) . If you calculate the cost of a basket of the prices at which its component parts are integrated into world trade (ie, butter from the United States stands on the world market of $ 1, and butter from France – Euro 5), it will be more important than the use of internal prices, etc.

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