What is the connection between the parity of purchasing power and the exchange rates?
parity and exchange courses of purchasing power are inseparably connected by the so -called Act on one price, which states that the goods should basically cost the same, regardless of where it is purchased. This is the concept of driving for a parity of purchasing power or PPP, which shows the relationship between countries in terms of their purchasing power. If a certain product stands in one country more than another, PPP suggests that disparity should equal the difference in exchange courses between the currencies of both countries. If this is not the case, it is a shopping opportunity for consumers, which will eventually increase the prices back to the balance of purchasing power parity.
For countries that have different currencies, exchange courses are determined for differences in values between these currencies. However, under the Act on one price, products should basically become the same everywhere and countries should have the same Purchasusing Power. This contradiction is explained by the relationship between purchasing power parity and exchange rates.
like pImagine that four units of currency in the ground and the same unit of currency in Country B, which means that the Earth has a exchange rate of four to one. In Country B there is a certain product of 25 units of currency. According to PPP, this product should cost 100 units of currency in country A. It is because the four to the other ratio equals a ratio of 100 to 25.
With the same example, imagine that the product is only awarded 95 units of currency in country A. This means that consumers would gain value by shopping in country A. It also means that under the laws of product A, causing product manufacturers in that country to increase production. Since more production means higher costs, companies responsible for production will increase the price of the product until it eventually reaches the equilibrium of the expected PPP.
In this way, purchasing power and exchange courses are basically in Tandem. It is important to realize that these concepts will only work if theThe rod countries will have competing markets. If the government controls the economic forces in the country or if there is a monopoly of a single company regarding the production of certain goods, it is likely that a bunch of purchasing power will be cast compared to exchange rates.