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Describe in words (be brief) the central idea behind the calculation of a Purchasing Power Parity...

Describe in words (be brief) the central idea behind the calculation of a Purchasing Power Parity (PPP) exchange rate. Put another way, if we have the actual rate at which two currencies exchange for each other, why bother with the PPP version?

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Answer #1

PPP or Purchasing power parity theory is the more realistic theory of the exchange rate explains the determination of the exchange rate between the country.

The theory has two version Absolute and Relative under

Absolute version- example the pair of the shoes cost 2500 in India the 50 in the USA then exchange rate is equal to 50 rupees equal to1 Dollar

Relative version due to inflation in the USA the shoe pair in India 2500 in USA 100 the exchanged rate is eqult 50 reuppes to equal 25 Dollar.

Thus they show how exchange rate is determined and how over the period it is changed.

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