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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

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

How can an unexpected fall in exchange rates injure the financial health of a nation’s banks?

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

A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because it decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom is caused by economic investment expenditure?

What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization?
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