Discuss the implications of the deviations from purchasing power parity for countries’ competitive positions in the world market.
Purchasing Power Parity (PPP) is the relationship between goods prices and currency prices (exchange rates)
It asserts that as goods prices change internationally, exchange rates must also change to keep prices measured in a common currency equal across countries.
If exchange rate changes satisfy PPP, competitive positions of countries will remain unaffected following exchange rate changes. Otherwise, exchange rate changes will affect relative competitiveness of countries. If a country's currency appreciates (depreciates) by more than is warranted by PPP, that will hurt (strengthen) the country's competitive position in the world market.
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