 Purchasing Power Parity: A Survey of the IssuesLi Lian Ong Chapter 1 in The Big Mac Index, 2003, pp 1-28 from Palgrave Macmillan Abstract: Abstract The purchasing power parity (PPP) doctrine, one of the most widely researched areas in international finance, is also probably one of the most controversial in the theory of exchange rate determination. According to the theory of purchasing power parity, the rate of exchange between two currencies is determined by the differences in the price levels of their respective countries. However, while proponents of the theory argue that PPP provides a strong basis for determining exchange rates, others have contended otherwise, with a plethora of empirical research demonstrating persistent deviations from PPP. Consequently, we provide a survey of the issues that contribute to the problems in testing the theory. Notably, factors such as the lack of uniformity in the price indices used to determine the long-run equilibrium exchange rate — also known as the ‘index-number problem’ — and the issue of productivity bias, which is probably seen as the most serious criticism of PPP theory, are discussed. We also consider the role of market imperfections as well as structural changes in the economy. Keywords: Exchange Rate; Gross Domestic Product; Real Exchange Rate; Purchase Power Parity; Nominal Exchange Rate (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-51241-2_1 Ordering information: This item can be ordered from Access Statistics for this chapter More chapters in Palgrave Macmillan Books from Palgrave Macmillan |
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