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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Explain the details of the purchasing power parity (PPP) theory.

To determine

The details of purchasing power parity (PPP) theory.

Explanation

The purchasing power parity is a theory that explains that the exchange rate of two currencies will be equal to the ratio of the respective currencies’ purchasing power. This can be explained with the help of an example. Suppose the price of the commodity in the US is $2, and that in Europe is 1 Euro. Thus, the exchange rate will be $1 = 0.5 Euro. This explains that if the purchasing power parity holds true, the item should cost the same amount of dollars anywhere in the world...

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