Answer to Question #238214 in Macroeconomics for Comfort

Question

What is the theory behind the PPP (purchasing power parity)? How does the economist use price to compute an implied PPP for each currency? What are the arguments against the use of PPP? (10 marks)

Answer 1

a)

Purchasing power parity is used for measuring prices at different locations. The theory states that, with no transaction costs and trade barriers for good, then its price should be the same in all locations.

b)

The economist use price to compute an implied PPP for each currency by dividing the cost of a good in one currency, by the cost of a good in another currency

c)

The arguments against the use of PPP include private partner financial incapacity, poor workmanship and conflicts.