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Discuss in detail the theory of Purchasing Power Parity.? Discuss?
Purchasing power parity is the
difference between purchasing ability of same goods of two
currencies. For example, it is the cost of purchasing a basket
comprised of different goods. So it is the cost of a basket which
could be comprised of banana, apple, milk and other goods which are
consumed by two nations. If a nation has to spend more currency in
order to buy the basket then its purchasing power is less when
compared with the other currency.
Using the purchasing power parity, the value of currencies can be determined in order to find an exchange rate between two currencies of two different nations.
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