Answer to Question #149331 in Macroeconomics for qianhe

Question

Explain the meaning of purchasing power parity. Give an example of what will happen when purchasing power parity does not hold in two economy.

Answer 1

Purchasing power parity  is a metric used by macroeconomic analysts that compares different countries' currencies through a "basket of goods" approach. An example is when two goods differ in price (expressed in a common currency) in different countries it won't be worth arbitraging and therefore correcting the price difference unless the anticipated profit exceeds the cost of shipping goods between the two locations.