purchasing power parity

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Purchasing power parity

The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Purchasing Power Parity

The theory stating that, in an efficient market, the exchange rate of two currencies results in equal purchasing power. That is, if one pound is worth two dollars, one pound in England should buy the same amount in goods and services that two dollars can buy in the United States. Fixed exchange rates, taxes, and other inefficiencies are thought to disrupt purchasing power parity. Some theorists believe the idea holds most true when comparing countries or regions with similar standards of living.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

purchasing power parity

the tendency for the EXCHANGE RATE between the currencies of two countries to reflect long-term differences in the INFLATION rates of these countries under a FLOATING EXCHANGE RATE SYSTEM. Thus, for example, if the inflation rate in country A were 10% per annum and that of country B 6% per annum, then in order to maintain parity between the PURCHASING POWER of the two currencies, country A's currency would have to depreciate by 4% against country B's currency.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson
References in periodicals archive ?
The "Big Mac Index" was devised in September 1986 by The Economist as an indicator of purchasing-power parity, by comparing the prices of hamburgers in different countries
"The PPP (purchasing-power parity)-adjusted GDP, preferred by economists when making international comparisons, takes into account the relative cost of living and inflation rates rather than just exchange rates, which may distort real differences in worth," stated the Forbes report.
The World in 2050 also predicts that in purchasing-power parity terms, the E7 group of emerging countries (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) will overtake the G7 economies (US, Japan, Germany, UK, France, Italy and Canada) by 2020.
The indicators are GDP-per-capita in purchasing-power parity terms, the level of human development, the fiscal balance, the net government debt, and the annual change in inflation rate.
According to estimates, an exchange rate calculated based on the level of purchasing-power parity between Japan and the United States should be about 150, the finance minister said, suggesting he favors the yen moving around that level against the dollar.
Quantitative easing could depreciate the yen if it leads to higher Japanese inflation through purchasing-power parity, whereby Japanese products could remain competitive internationally only if the yews international value fell, However, continued deflation and the weakness in M2 plus CDs reduce the likelihood of this occurring in the near term.
More daring people will not, and choose, with a small number of economists in 1947, and Senator Joseph Ball, to think it safe enough to get European countries to balance their budgets, fix their money supplies, and depreciate the currency to the purchasing-power parity.
In terms of purchasing-power parity, for example, which designates a constant spread of prices, a product priced at 1 dollar in New York could be bought for 137 yen in Tokyo in 1999, down from 141 yen the previous year.

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