Chapter 10.2, Problem 4QS2

Summary Introduction

To Determine:

Factors that influence the power of purchasing power parity to accurately predict exchange rates.

Introduction:

Purchasing Power Parity (PPP) of two countries´ currenciesis the relative ability to buy the same "basket" of goods in these two countries.When the two country’s currency is compared through the approach of “basket of goods” is referred as the principal of purchasing power parity in context to exchange rates.