Answered: Explain purchasing power parity

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 10Q

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Explain purchasing power parity

Expert Solution

Step 1

The formula to compute purchasing power parity:

Step 2

Purchasing power parity:

Purchasing power parity (PPP) is a concept which means that exchange rates among currencies are in equilibrium if their buying power is the equivalent in each of the two nations.

Purchasing power parity is a price measure in diverse nations that utilizes the prices of particular goods to associate the absolute buying power of nations currencies. In numerous cases, purchasing power parity makes an inflation rate that is equivalent to the price of the basket of goods at one site divided by the price of the basket of goods at a diverse place.

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