What is the theory of parity of purchasing power?
The theory of purchasing power parity is the idea that exchange courses between different currencies naturally deal with a position that means that the same goods are the same price in each country. Theory claims that if this is not the case, the transaction costs and barriers of trade are the cause. The theory of purchasing power parity is definitely not in fact, although its supporters would claim that it simply shows the range of free market obstacles.
To understand how the theory of purchasing power would work in practice, imagine that the DVD movie costs $ 20 (USD) in the United States. If the exchange rate between the US dollar and the Mexican dog were 1:10, then the theory would suggest that the same DVD film could cost 200 pesos in Mexico. In other words, theory suggests that the film is actually 160 pesos in Mexico, then the exchange rate moves to 1: 8.
logic behind the theory of parity of purchasing power is based on the concept of the Act on One CEna. In the absence of local tax changes or transport costs, the same goods should become the same amount in different countries. This is because people use price differentials in free market theory. For example, if, as soon as the exchange rate was considered, the DVD has developed cheaper in Mexico, American traders would buy them in Mexico and sell them for profit in the US. On the other hand, this would increase the demand in Mexico until the price has increased to meet the accused in the US.
The theory of purchasing power parity will simply transfer the law on one price to a summary level. In other words, it focuses on the combined effects of the way the law affects each individual item. For example, American traders will have to buy DVDs for Pesos American dollars. Throughout the goods and services is the theory that this will affect the exchange rate. The combination of the demand and supply of goods in different countries and demand and the supply of currency should eventually lead to the parity of purchasing power.
In practice, the parity of purchasing power is very rare. In SKThere are often huge differences between different areas of the same country, let alone between countries with two different exchange rates. The theory states that this is due to differences in turnover taxation between different countries, the cost of transporting goods between countries and trade obstacles such as import restrictions or obligations. Some economists argue that differences are also caused by various patterns of demand, such as Americans as a whole less interest in buying DVD movies in Spanish than Mexicans.