![]() ![]() The World Bank's World Development Indicators 2005 estimated that in 2003, one Geary–Khamis dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity -considerably different from the nominal exchange rate. A well-known purchasing power adjustment is the Geary–Khamis dollar (the international dollar). There can be marked differences between purchasing power adjusted incomes and those converted via market exchange rates. These numbers often come with the label PPP-adjusted. One use of PPP is to predict longer-term exchange rates.īecause PPP exchange rates are more stable and are less affected by tariffs, they are used for many international comparisons, such as comparing countries' GDPs or other national income statistics. Also, tariffs and differences in the price of labour (see Balassa–Samuelson theorem) can contribute to longer-term differences between the two rates. The market rate is more volatile because it reacts to changes in demand at each location. The PPP exchange rate may not match the market exchange rate. Organizations that compute PPP exchange rates use different baskets of goods and can come up with different values. So, ones traded easily and are commonly available in both locations. In general, goods are chosen that might closely obey the law of one price. The value of the PPP exchange rate is very dependent on the basket of goods chosen. The name purchasing power parity comes from the idea that, with the right exchange rate, consumers in every location will have the same purchasing power. For example, if a basket consisting of 1 computer, 1 ton of rice, and half a ton of steel was 1000 US dollars in New York and the same goods cost 6000 HK dollars in Hong Kong, the PPP exchange rate would be 6 HK dollars for every 1 US dollar. PPP then computes an inflation and exchange rate as the ratio of the price of the basket in one location to the price of the basket in the other location. The PPP term accounts for this by using a basket of goods, that is, many goods with different quantities. Poverty, tariffs, transportation and other frictions prevent trading and purchasing of various goods, so measuring a single good can cause a large error. If its price is 500 US dollars in New York and the same computer costs 2,000 HK dollars in Hong Kong, PPP theory says the exchange rate should be 4 HK dollars for every 1 US dollar. Ideally, a computer in New York and in Hong Kong should have the same price. It is based on the law of one price, which says that, if there are no transaction costs nor trade barriers for a particular good, then the price for that good should be the same at every location. Purchasing power parity is an economic term for measuring prices at different locations. PPP is usually compared to the United States. The calculation of the PPP, according to the OECD, is made through a basket of goods that contains a "final product list covers around 3,000 consumer goods and services, 30 occupations in government, 200 types of equipment goods and about 15 construction projects". The purchasing power parity indicator can be used to compare economies regarding their gross domestic product (GDP), labour productivity and actual individual consumption, and in some cases to analyse price convergence and to compare the cost of living between places. The PPP inflation and exchange rate may differ from the market exchange rate because of tariffs, and other transaction costs. PPP is effectively the ratio of the price of a basket of goods at one location divided by the price of the basket of goods at a different location. Purchasing power parity ( PPP) is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currencies. Please consider expanding the lead to provide an accessible overview of all important aspects of the article. This article's lead section may be too short to adequately summarize the key points. ![]()
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |