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Purchasing Power Parity Purchasing power parity is universally used to compare price level of different countries hence making it simple to understand and interpret data for every country. PPP’s goal is to help in identifying adjustments that should be made in the exchange rates of different country’s currencies and make them at equilibrium with the purchasing power of each other…
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Download file to see previous pages... This form of writing provides a deep analysis of Purchasing Power Parity and highlights some of the PPP’s significance in the economy. PPP theory is used in various situations including adjustments for the price differences between countries and provides the solution of comparing countries with dissimilar wellbeing standards as well as setting exchange rate for new countries. By comparing the value of output from different countries and considering exchange rate for ease of data comparison, a lot of information between countries can be obtained (Yavuz 2013, p. 118-121). PPP may make it easy to determine numerous things such as the speed at which the global economy grows and further determine a country, whose average persons are better off. Purchasing Power Parity exchange rate is one of the numerous techniques that can be used to convert different country’s statistics into a common currency (Carvalho & Nechio 2011, pp. 2412-2423). It is worth noting that the PPP exchange rate must not be similar with the one that prevails in the financial markets as it may either be more or less. Nevertheless, comparison of prices between different countries considers several products and services, which is a very complex task due to the massive amount of data, and the sophistications encountered in the process. In facilitating the price comparison process, always an International Comparisons Program (ICP) generates PPPs founded on global survey of prices where every participating country provides national average prices for several products. PPP is deemed a better measure of the overall wellbeing and its exchange rates are always fairly stable over time. Unfortunately, PPP is not easy to determine compared to other approaches such as the market based rates since ICP is a huge statistical undertaking and there are challenges of methodological involved such as estimation of the PPP rates that may lead to inaccuracies. Additionally, another challenge of using the PPP approach is that there are products that are never available in some countries thus limiting their utilization in comparison purposes. According to Adhikari, Guru-Gharana & Flanagan (2011, p. 4-8) because these countries share almost same economic trend of consumption normally experience better PPP exchange rates compared to countries that do not have similar economic characteristics. On the other hands, most of the developing countries particularly in Africa and Asia may make it difficult to obtain an adjusted exchange rate for PPP because they do not have well-kept economic records deemed important in determining the PPP exchange rates (Taylor 2009, 19-24). Although it may be presumed that, the nominal exchange rate and PPP may be comparatively similar there is always, an evident of a marked difference in the PPP’s accustomed exchange rates. It is significant to note that the PPP figures are normally grounded on the law of one price that indicates that products and services cost similar amounts everywhere such as the price of Big Mac in UK and France are similar. This assumption is vital in comparing the two products directly in ...Download file to see next pagesRead More
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