Question

PPP Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation?

Answer 1

Answer: The theory of "Purchasing Power Parity" states that the exchange rates between the different currencies must be such that it allows a currency to have the same purchasing power anywhere in the world.

If you can buy a television with 1,000 dollars in the United States, with those same 1,000 dollars you should also be able to buy in Spain, or in Japan.

When a country maintains high levels of inflation, for a long period of time, the increase in the price of goods is nothing more than a fall in the value of its currency. Therefore, it is reasonable for your currency to depreciate against currencies of other countries as well.