Exchange rates and exchange policies - PPP

4 important questions on Exchange rates and exchange policies - PPP

The value of a currency is determined by the amount of goods and services one may buy with one currency unit

Purchasing power parity

Commodity PP if equality is not held:

  • Arbitrage transactions are carried out
  • prices get equal

Takes prices of a basket of goods into account

Absolute PPP
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Currency with a higher inflation depreciates

Relative PPP

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