Question

Outline the PPP theory. Why do researchers usually think PPP is a puzzle?

Answer 1

Purchasing power parity (PPP) is a 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.

Researchers generally try to see that whether this therory is practical in real market. But when they compare rates of commodity from one market to another with their foreign currecncy, every commodity is not exist at PPP. Their is price difference in commodity of different country when compare to their equivalant exchange rates. Further this theory do not hold practical in long run also. That's why researcheer generally think that PPP is a puzzle.