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1.   What is the theory of purchasing power parity? Why would purchasing power parity hold? What...

1.   What is the theory of purchasing power parity? Why would purchasing power parity hold? What is the evidence on purchasing power parity: does it hold or not? If there are deviations from purchasing power parity, why are there deviations? Please provide any evidence or research available on these issues.

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Answer #1

Purchasing power parity (PPP) is theory that holds that the nominal exchange rate between two currencies should be equal to the ratio of aggregate price levels between the two countries, so that a unit of currency of one country will have the same purchasing power in a foreign country.

purchasing power parity may hold in some cases just n the basis of assumption that the price of internationally traded goods should be same anywhere in fixed currency. but there are deviations for example if some countries grow more coffee than other , it can sell coffee at lower price than others even though coffee is an internationally traded good.

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