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.