The PPP term accounts for this by using a basket of goods, that is, many goods with different quantities. Poverty, tariffs, transportation and other frictions prevent trading and purchasing of various goods, so measuring a single good can cause a large error. If its price is 500 US dollars in New York and the same computer costs 2000 HK dollars in Hong Kong, PPP theory says the exchange rate should be 4 HK dollars for every 1 US dollar. Ideally, a computer in New York and in Hong Kong should have the same price. It is based on the law of one price, which says that, if there are no transaction costs nor trade barriers for a particular good, then the price for that good should be the same at every location. Purchasing power parity is an economic term for measuring prices at different locations.
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