This document discusses criticisms of the Purchasing Power Parity (PPP) theory. It lists 7 criticisms: 1) Comparing prices without accounting for quality is unrealistic. 2) Price indexes include all goods/services whether traded internationally or not. 3) Transportation costs are ignored. 4) Assuming no trade barriers is unrealistic. 5) Impact of exchange rate changes on prices is ignored. 6) PPP does not explain demand and supply in foreign exchange markets. 7) PPP does not explain short-term changes in exchange rates.

1. PURCHASINGPOWER
PARITY

7. CRITICISMS FOR PPP
Comparison of prices
without regard to
quality is unrealistic
Price index number
includes the price of all
commodities and services
including those which are
not internationally
traded
Cost of
Transportation
is ignored
No trade barriers-
is an unrealistic
assumption
Ignores the impact
of changes in the
exchange rates on
the prices
Doesn’t explain the
demand for supply
in foreign exchange
No explanation of
short-term
changes in
exchange rates
Goes conflicting
to general
experience