PURCHASING POWER PARITY THEORY AND EXCHANGE RATE1 Purchasing Power Parity Theory and Exchange Rate Student’s Name Professor’s Name Institution Table of Contents Purchasing Power Parity Theory and Exchange Rate 3 Overview of Purchasing Power Parity Theory 3 Purchasing Power Parity and the Law of One Price 4 Types of Purchasing Power Parity 6 Long Run Exchange Rate 6 Ongoing Inflation, Interest Parity, and Purchasing Power Parity 8 Strengths and Weaknesses of Purchasing Power Parity 9 Empirical Analysis of Purchasing Power Parity Theory 10 Factors Explaining the Problem with Purchasing Power Parity 12 Traded Goods 12 Non-Tradables 13 Deviations from Free Competition 14 Price Measurement Levels and Consumption Patterns 14 Purchasing Power Parity in the Short Run and Long Run 15 Conclusion 16 Reference List 17 Purchasing Power Parity Theory and Exchange Rate No nation is rich enough to rely on free gold standard. All countries across the globe have paper currencies that are not convertible into other valuable things including gold. Hence, nowadays nations have standard paper currencies, which complicate exchange situations. In such cases, the exchange rate between two currencies can be determined by their purchasing powers. The purchasing power parity theory holds that the rate of exchange between two nations depends on their currencies’ relative purchasing power. In essence, the exchange rate between currencies of two nations equals the ratio of their price levels. The purchasing power parity, therefore, predicts that a decline in a currency’s domestic purchasing power due to an increase in domestic prices, will lead to a proportional depreciation of the currency in foreign exchange market (Paul, Kimata & Khan 2017). Conversely, purchasing power parity holds that an increase in currency domestic purchasing power will result in a proportional currency appreciation. For instance, if a certain good can be bought for $1 in the United States and 60 rupees in India, the purchasing power of$1 in the United States equals to purchasing power of 60 rupees in India. If in the United States $1 can buy a collection of goods that cost 80 rupees in India, then the exchange rate will be $1 equals to 80 rupees. This report tests the validity of absolute purchasing power parity and relative purchasing power by comparing the prices of commodities in the United States and India, and the exchange rates between the two countries. What product you are comparing mention it as well ??? Overview of Purchasing Power Parity Theory Purchasing power parity is a simple theory that states that the nominal exchange rate between different currencies is the same as the ratio of aggregate commodity price levels between the two nations. This way, the unit of currency of one nation has the same purchasing power in another country. This theory has a long history, dating back many years ago (Pilbeam 2013). The primary idea behind the theory is that a unit of currency ou ...

1. PURCHASING POWER PARITY THEORY AND EXCHANGE
RATE1
Purchasing Power Parity Theory and Exchange Rate
Student’s Name
Professor’s Name
Institution
Table of Contents
Purchasing Power Parity Theory and Exchange Rate 3
Overview of Purchasing Power Parity Theory 3
Purchasing Power Parity and the Law of One Price 4
Types of Purchasing Power Parity 6
Long Run Exchange Rate 6
Ongoing Inflation, Interest Parity, and Purchasing Power Parity
8
Strengths and Weaknesses of Purchasing Power Parity 9
Empirical Analysis of Purchasing Power Parity Theory 10
Factors Explaining the Problem with Purchasing Power Parity12
Traded Goods 12
Non-Tradables 13
Deviations from Free Competition 14
Price Measurement Levels and Consumption Patterns 14
Purchasing Power Parity in the Short Run and Long Run 15
Conclusion 16
Reference List 17

2. Purchasing Power Parity Theory and Exchange Rate
No nation is rich enough to rely on free gold standard. All
countries across the globe have paper currencies that are not
convertible into other valuable things including gold. Hence,
nowadays nations have standard paper currencies, which
complicate exchange situations. In such cases, the exchange rate
between two currencies can be determined by their purchasing
powers. The purchasing power parity theory holds that the rate
of exchange between two nations depends on their currencies’
relative purchasing power. In essence, the exchange rate
between currencies of two nations equals the ratio of their price
levels. The purchasing power parity, therefore, predicts that a
decline in a currency’s domestic purchasing power due to an
increase in domestic prices, will lead to a proportional
depreciation of the currency in foreign exchange market (Paul,
Kimata & Khan 2017).
Conversely, purchasing power parity holds that an increase
in currency domestic purchasing power will result in a
proportional currency appreciation. For instance, if a certain
good can be bought for $1 in the United States and 60 rupees in
India, the purchasing power of$1 in the United States equals to
purchasing power of 60 rupees in India. If in the United States
$1 can buy a collection of goods that cost 80 rupees in India,
then the exchange rate will be $1 equals to 80 rupees. This
report tests the validity of absolute purchasing power parity and
relative purchasing power by comparing the prices of
commodities in the United States and India, and the exchange
rates between the two countries. What product you are
comparing mention it as well ??? Overview of Purchasing
Power Parity Theory
Purchasing power parity is a simple theory that states that
the nominal exchange rate between different currencies is the
same as the ratio of aggregate commodity price levels between
the two nations. This way, the unit of currency of one nation
has the same purchasing power in another country. This theory
has a long history, dating back many years ago (Pilbeam 2013).

3. The primary idea behind the theory is that a unit of currency
ought to be able to purchase the same basket of commodities in
one nation as the equivalent amount of foreign currency can
purchase in a foreign country. Hence, there is parity purchasing
power of one unit of currency across different economies.
The simplest means of determining whether or not there is
a discrepancy from purchasing power parity is to compare the
price of identical commodities from the basket in two different
nations. For instance, the Economist newspaper normally
compares the prices of MacDonald Big Mac hamburgers around
the globe with the United States dollars at prevailing market
exchange rates. By doing so, it is easy to determine whether or
not a given currency is overvalued or undervalued against the
dollar at prevailing exchange rate. For instance, in July 2019, a
Big Mac burger was selling at £3.29 in United Kingdom against
$5.74 in the United States, implying an exchange rate of 0.57.
The variance between this and the actual exchange rate of 0.80,
suggests an undervaluation of the British pound by 28.5 percent
(Economist 2019).Purchasing Power Parity and the Law of One
Price
The purchasing power parity holds due to international
goods arbitrage related to the law of one price. This law asserts
that the price of a globally traded commodity should remain the
same anywhere around the world as long as the price has been
expressed in common currency. This is due to the fact that
people to earn riskless profits by moving commodities from
areas where the price is low to areas where the price is very
high. If the same commodity enters each nation’s market basket
used to derive the aggregate price level, then the law of one
price holds that a purchasing power parity exchange rate must
hold between the two economies concerned (Lee & Yoon 2013).
Proponents of purchasing power parity theory content that its
validity as a long run theory does not necessarily need the law
of one price to be exact.
Even if the law does not hold for each individual good,
proponents of the theory contend that prices and exchange rates

4. ought not to deviate too far from the relation determined by
purchasing power parity. When commodities are more expensive
in one nation than in other countries the demand for its
commodities and currency declines, which pushes both the
domestic price and the exchange rate back in line with
purchasing power parity. Conversely, relatively cheap domestic
products lead to appreciation of currency as well as price level
inflation. Purchase power parity, therefore, holds that even if
the law of one price is literally untrue, the resultant economic
factors will eventually equalize the currency’s purchasing
power in different nations (Krugman, Obstfeld, & Melitz 2012).
Opponents of law of one price posits that the presence of
transaction costs such as transportation costs, tariffs, non tariff
barriers, and taxes, would violate the law of one price. In
addition, not all commodities are traded between countries and
different countries do not attach similar weights to similar
commodities in aggregate price indices. Moreover, different
economies produce commodities that are differentiated instead
of perfectly substitutable goods. Also, given that purchasing
power parity is anchored on traded commodities, the law of one
price can be effectively tested using producer price indices that
contain the price of manufactured tradable goods instead of
consumer price indices (Bahmani-Oskooee & Nasir 2015).
Types of Purchasing Power Parity
Notwithstanding the aforementioned objections, it is
always held that the purchasing power parity theory of exchange
rates holds due to international goods arbitrage. Generally,
there are two means in which the purchasing power parity
hypothesis might be true- absolute purchasing power parity and
relative purchasing power parity (Liang 2013). Absolute
purchasing power parity remains true when a unit currency’s
purchasing power parity is the same in both the domestic
economy and foreign economy, once the unit currency is
converted into foreign currency at the current market exchange
rate. Nonetheless, it is usually challenging to determine whether

5. the same basket of commodities is available in different nations.
Hence, it is important to test relative purchasing power
parity. Relative purchasing power parity posits that the
percentage change in exchange rate during a given period of
time offsets the variations in inflation rates between economies
concerned over the same duration. Generally, if absolute
purchasing power parity holds, the relative purchasing power
parity must also hold (Zhang & Bian 2015). However, absolute
purchasing power parity must not hold if the relative purchasing
power parity holds because it is common for common variances
in nominal exchange rates to happen at different purchasing
power levels for the two economies (Findreng 2014).
Mathematically, relative purchasing power parity between the
United States and India is expressed as;
(E$/rupee, t – E$/rupee, t-1)/E$/rupee, t-1 = πe us-πe India
Where πe denotes the rate of inflation, πe = (pt-pt-1)/pt-1Long
Run Exchange Rate
The theory of purchasing power parity, when combined
with money demand and supply relationship, leads to a
significant theory of the interaction between exchange rates and
monetary factors. Since the factors that do not affect money
supply and money demand do not impact this theory, it is
usually referred to as the monetary approach to exchange rate.
This approach helps in understanding the long run theory of
exchange rates (Al-Gasaymeh & Kasem 2016). The monetary
approach to exchange rates is a long run rather than a short run
theory due to the fact that it does not accommodate price
rigidities, which help in understanding short run macro-
economic developments. On the contrary, the monetary
approach to exchange rate proceeds as though prices can adjust
immediately to maintain purchasing power parity and full
employment (Abbas Ali, Johari & Haji Alias 2014).
To derive the monetary approach to exchange rate
predictions for dollar/rupee exchange rate, it is important to
assume that in the long term, foreign market determines the rate
so that purchasing power parity holds.

6. Rupee (dollar/rupee) = Price (USA)/ Price (India)--------------(i)
It is assumed that the above equation should hold if there are no
market rigidities to prevent immediate adjustment of exchange
rates and other prices to levels that are consistent with full
employment.
In the United States;
P (US) = Ms US/L(R$, YUS) ------------------- (ii)
While in India;
P (India) = Ms India/L(R rupee,Y rupee)-----------------(iii)
Where;
Ms refers to a nation’s money supply
L(R,Y) refers to a country’s aggregate real money demand,
which falls with an increase in interest rates and rises with an
increase in real output.
Equations (ii) and (iii) demonstrate how the monetary
approach to exchange rate derives its name. The statement of
purchasing power parity in equation (i) shows that the dollar
price of rupee is the dollar price of the United States’ output
divided by rupee price of India output. The two price levels are,
therefore, determined by the supply and demand of each
country’s currency. The United States’ level of price is money
supply in the United divided by real money demand in the
United States. Similarly, the price level in India is the Indian
money supply divided by India’s real money demand. Hence,
the monetary approach to exchange rate predicts that real
exchange rate- the relative price of dollar and rupee- is
determined in the long run by not only the relative supplies of
those currencies but their relative real demand as well.
Ongoing Inflation, Interest Parity, and Purchasing Power Parity
Although a permanent increase in a country’s level of
monetary supply leads to proportional increase in its price
levels, it does not pose any long run effects on interest rates and
real output. Whereas a conceptual examination of a short run
money supply change is important in determining the long run
impacts of money, it is an unrealistic description of monetary
policies. The reasoning is that continuing growth in money

7. supply will need a continuing increase in price level or ongoing
inflation. Other factors remaining constant, constant growth of
money supply at a given rate leads to ongoing inflation of price
levels at the same rate. Nonetheless, changes in the long run
rate of inflation do not affect the long run relative price of
commodities or full employment output level (Saadon &
Sussman 2018).
The interest rate, nonetheless, is independent of long run
growth rate of money supply. Whereas the long run rate is
independent of the absolute level of money supply continuous
growth in money supply will affect interest rate (Taylor &
Sarno 2004). The interest parity condition holds that if people
expect the relative purchasing power parity to be true, the
difference between interest rates provided by rupee and dollar
deposits must equal the difference between expected interest
rates in India and the United States. The interest parity
condition between the United States dollar and Indian rupee is
expressed as;
R$ = R (rupee) +(E$/rupee- E$/rupee)/E$/rupee
(E$/rupee- E$/rupee)/E$/rupee=πe us-πe India
Thus,
R$-Rrupee= πe us-πe India
If currency depreciation can offset the difference in
international inflation, so that πe us-πe India is the expected
dollar depreciation, the difference in interest rate is equal to the
expected difference in inflation. Strengths and Weaknesses of
Purchasing Power Parity
The primary strength of purchasing power parity is that it
always remains stable over a long period of time. The relative
purchasing power parity, in particular, proves that exchange
rate should equal purchasing power parity in the long run. This
can be attributed to a decline in rate of inflation between two
countries. Nonetheless, conditions relating to prices and tariffs
tend to change all the time hindering people’s ability to arrive
at a stable conclusion regarding exchange rates. The purchasing
power parity can only apply to a static world, but the world is

8. dynamic. This is due to the fact that with time the exchange rate
will rise will price level continue decline, leading to a situation
where exchange rate is greater than price levels. Rose, Marquis
and Lu (2012) indicate that internal prices and production costs
are always changing. Hence, a new equilibrium between two
different currencies changes on daily basis. Differences in two
nation’s economic performance, especially in relation to
transport and tariffs, can deviate normal exchange rates to
certain levels from a currency’s intrinsic purchasing power. The
exchange rate value of a country’s currency will rise while its
price levels will remain constant if it decides to raise its tariffs.
Can u add more strength of PPP theory and more weaknesses of
the theory as is an important part and has to be critically
explained <<<<Empirical Analysis of Purchasing Power Parity
Theory
Overall, the absolute and relative purchasing power parity
theories do not effectively explain the relationship between
actual data on exchange rates and price levels. Relative
purchasing power parity, which is always considered a
reasonable estimation to exchange rate data well for a given
duration. An analysis of figure 1 demonstrates strengths of
relative purchasing power parity by plotting the United States
dollar against Indian rupee exchange rates, Erupee/$, and the
ratio of India’s and the United States price levels, Pindia/Pus,
between 2008 and 2018. Price levels are illustrated by indexes
reported by both the Indian and the United States governments.
Relative Purchasing Power Parity
Relative purchase power parity predicts that Erupee/$ and
the ratio of India’s and United States’ price levels will move
proportionately, which is not the case. From 2008 to 2018, the
Indian rupee gained significant strength against the United
States dollar. In 2018, the exchange rate was 70.83, which was
equal to the purchasing power price. This validates the relative
purchasing power parity assertion that exchange rates and price
levels in two economies should equal out after a given period of
time. As the rate of inflation continued to decrease from 1.74 on

9. January 1, 2008 to December 1, 2018, relative purchasing power
parity also decreased from 133.68 to 70.83. Nonetheless, the
relative purchasing power parity can only apply partially even if
the long run understanding of purchasing power parity and
exchange rate is taken into consideration.
More explanation needed about the graph 1 (exchange rate) add
more information ) what happened ? what is the history behind
that.. more critical evaluation
Figure 1: the Indian rupee/United States dollar exchange rate
and India-U.S price levels between 2008 and 2018
1-You should add the deviation graph as well and explain it ?
2-what happened? 3-what is the history behind this increase
during the last 10 year ? 4-and explain in details this graph what
the deviation represent ? and relevant information related to this
graph .. what does it show ? what are those number related to
ppp ???
After you finish the relative theory part you have to say if the
data we had in the real world is the same as the relative theory
explains … even if is not the same its still fine but we have so
say that ..
Absolute Purchasing Power Parity
To test the effectiveness of absolute purchasing power
parity theory, it is important to compare international prices of
a broad basket of commodities by making necessary adjustments
for inter-country quality variations among the identified goods
and services. These comparisons normally hold that absolute
purchasing power parity is ineffective. The prices of identical
goods, when converted into one currency, tend to vary across
different economies. According to Çağlayan and Filiztekin
(2012), even the law of one price is ineffective in explaining the
relationship between purchasing power parity and exchange
rate. For instance, manufactured commodities that tend to be the

10. same in different countries normally sell at different prices.
Since the assertion that leads to absolute purchase power parity
is anchored on the law of one price, there is no doubt that
purchasing power parity does not support the data. To
understand the impact of absolute purchasing power parity,
there is need to prices of traded and non-traded goods in
different countries. Traded Goods This part is not ok as the
product I asked for traded goods is Vans shoes … and if you
cant find Vans shoes data you can do Nike is still ok but has to
be shoes company….
-in this part you are comparing the prices in the different
country by doing the Big mac index the table you have done is
not the same I sent you … you have to follow the table below
and compare them in this way … and explain the numbers ???
-you should mention a small sentence of why we have chosen
this product and these countries ?
-since the price of the product compared to the countries are in
different currencies you should convert all the prices to US
dollar in order to compare them .
-you should include the excel of the Big Mac index for the
calculations you have to show me how u did the calculations
and
This is the table local price of the product , exchange rate ,
dollar price , ppp, and the value the calculation has to be done
in excel and here only the table …. Like this
The formulas to do this calculation are below :
DP=LOCAL PRICE/ EXCHANGE RATE
PPP= FOREIGN PRICE/ LOCAL PRICE
VALUE= (PPP/ER)-1
And you should find the local price and the foreign price
changed to dollar . and the exchange rate
-what make the prices different from one country to other ,
transport people in one country might buy it more luxury , tax
etc explain those things in details …….

11. Trade restrictions and transport costs make it expensive to
ship commodities between markets that are located in different
nations, which can hinder the law of one price underlying
purchasing power parity. In 2013, a Ford Focus was selling at
$21,850.90 in the United States, £15,246 in the United
Kingdom, £15,384 in Germany (Boyce, 2013) and 120,000
rupee in India. However, when converted to the United States,
the vehicle cost $23,658.74, $23,872.89, and $22,301.56 in the
United Kingdom, Germany, and India respectively. The
purchasing power price, on the other hand, stood at 21850.90 in
the United Kingdom, 21850.90 in Germany, and 21850.90 in
India. This invalidates the absolute purchasing power parity
assertion that the price of the same good in different economies
ought to be equal when measured using a common currency. The
variations in the price of Ford Focus can be attributed to
various factors such as transportation cost, tax differences, and
government interventions.
Ford Focus
Official Rate
Implied
Actual
Under(-)/
PPP
PPP
Local Price
Dollar Price
Dollar PPP
Exch.Rate
Overvaluation
Exchange Rate
Mac Price
United States
$21,850.90
1.00

12. United Kingdom
$23,658.74
1.55
1.08
1.00
0.08
1.08
21850.90
India
$22,301.56
53.81
0.98
1.51
-0.35
0.98
22761.51
Germany
$23,872.89
1.55
1.09
12.96
-0.92
1.09
21850.90
Table 1: the Big Mac currency table for tradable goods
Non-Tradables
Same as the tradable goes for non tradable the table the
calculation same as the one I have posted the explanations the
reason you chose those countries for this product what makes

13. the price different what are the prices why are more or less
expensive etc….. and everything related to big mac index
explanation
Just to let you know that normally the PPP theory should not
really work for service goods like McDonalds or Starbucks (as
it is not really possible to buy a cheap BigMac from Beijing) ..
so u can either change the drink to fanta or pepsi or anything
else or use Starbucks but mention any wrongs you see in the
data and explain it in details.
After the theory has been tested is the theory of absolute ppp
explain the real words ? how? and why ?yes or no ?
The cost of transportation can be so huge relative to cost
of production that they cannot be traded across different
countries at a profitable. For instance, an American desiring a
cup of Indian produced Starbuck coffee may have to move to
India or import the product to the United States. In both cases,
the transport cost is greater than the price paid for the product
being bought. Indian produced coffee are consumed by Indian
residents while American produced coffee are consumed by
American residents (see table 2). Ryu and Ko (2011) indicate
that the existence of countries of nontradable commodities,
whose prices are not related internationally, leads to systematic
deviations from both absolute and relative purchasing power
parity. Most importantly, since the price of nontradable goods
is dependent on its domestic supply and demand forces, shifts in
demand and supply curves may result in changes of domestic
price of a broad basket of commodity relative to foreign price of
a similar basket of commodity.
In 2018, the price of Starbucks coffee was $2.75 in the
United States, $2.88 in the United Kingdom, $1.67 in India, and
$6 in Germany. The differences in price levels for Starbucks
coffee invalidates absolute power purchasing parity assertion
that the same good in different economies ought to be equal if
measured using a common currency. The differences in price of

14. Starbuck’s coffee in these countries can be attributed to several
factors affecting the demand for and supply of coffee.
Starbucks Coffee
Official Rate
Implied
Actual
Under(-)/
PPP
PPP
Local Price
Dollar Price
Dollar PPP
Exch.Rate
Overvaluation
Exchange Rate
Mac Price
United States
$2.75
1.00
1
United Kingdom
$2.88
1.55
1.05
1.00
0.05
1.05
2.75
India
$1.67

15. 53.81
1.64
1.51
0.09
1.64
1.02
Germany
$6.00
1.55
2.18
12.96
-0.83
2.18
2.75
Table 2: the Big Mac currency table for non-tradable
goodsFactors Explaining the Problem with Purchasing Power
Parity
There are several factors explaining the negative empirical
outcome described above. First, Lee (2010) indicates that
contrary to the law of one price assumptions, other factors such
as trade barriers and transportation costs exist in trade. These
factors may be high enough to hinder trading of goods and
services between two countries. Monopolistic practices can
also interact with trade barriers to weaken the link between
prices of similar commodities sold in different economies.
Furthermore, since the inflation data reported between India and
the United States are based on different baskets of commodities,
exchange rate changes cannot offset official inflation measures,
even in the absence of trade barriers and tradable products.
The primary lesson learned is that transport costs can
affect the close link between the prices of commodities as
explained by the law of one price and exchange rates.Overall,
the greater the cost of transportation the greater the range of
exchange rate, given the prices of commodities in different
countries. Trade barriers such as tariffs and quotas have same

16. effect on exchange rate since a fee paid for customs duty affects
an importer’s profit just as shipping fee.
Deviations from Free Competition
Simultaneous occurrence of imperfectly competitive
market structures and trade hindrances can weaken linkages
between price levels of different countries. An extreme scenario
happens when a single organization decides to charge different
prices for a given commodity in different markets. This pricing
to market mechanism may result in different demand levels in
different nations. For instances, economies characterized with
inelastic demand tend to charge higher markup prices over a
monopolistic seller’s cost of production.Bastos, Ferreira and
Arruda (2018) in an analysis of company level export data
found strong evidence of pervasive pricing technique to
manufacturing trade markets. In 2013, for instance, Ford Focus
cost £15,384in Germany and £16,857 in France irrespective of
the fact that the two countries shared the same currency and
despite the move to remove trade barriers in Europe (Boyce,
2013). The combination of market segmentation and product
differentiation violates the law of one price as well as the
absolute purchasing power parity. Shifts in demand as well as
market structures can violate relative purchasing power parity.
Since our product are the one above don’t mention any other
examples like ford or others focus on the products u chosen
Price Measurement Levels and Consumption Patterns
Different governments across the world have different
measures of price levels. One of the primary reasons for the
difference in measures of price levels is that residents of
different countries always spend their incomes differently.
Ghosh (2018) asserts that people tend to consume higher
proportions of domestic products, both tradable goods and non-
tradable, than foreign made products. An average Indian is,
therefore, more likely to consume more Indian produced
Starbucks coffee than her American counterpart while an

17. American resident is more likely to consume American
produced Starbucks coffee than an Indian. As a result it is likely
that the Indian government is likely to have relatively high
weight on Indian produced coffee when constructing a
commodity basket for measuring purchasing power. Since
relative purchasing power parity makes predictions about
changes in commodity prices instead of price levels, it makes
sense to define the level of prices in the economies being
compared. If, for instance all United States prices increase by
20 percent, relative purchasing power parity will be satisfied for
domestic and foreign price level indexes. This can happen if
there are no changes in prices abroad. However, any change in
relative prices of commodities can invalidate relative
purchasing power parity.
Purchasing Power Parity in the Short Run and Long Run
The aforementioned factors associated with purchasing
power parity’s poor empirical test performance can lead to
divergence of national prices in the long run, after all prices
have adjusted to their clearing levels. But many prices may take
time to adjust fully and departures from purchasing power
parity can be greater in the short run rather than in the long run
(AbuDalu & Ahmed 2013). A depreciation of the dollar against
foreign currencies, for instance, makes personal computers in
the United States less costly relative to similar product
produced in other countries. As users in India shift their demand
for Ford Focus, the price of the American produced car will rise
to reduce the departure from the law of one price resulting from
depreciation of dollar. It will take some time for the price
increase process to increase, and prices for the United States
and foreign vans may vary while markets try to adjust to
changes in exchange rates. as I said don’t add any new product
our products are the one above chosen
Short run departures from purchasing power parity tend to
disappear over time, with nearly 50 percent of the effect of
temporary deviations from purchasing power parity remaining

18. in the long run a reference for this point ?. Even when such
temporary purchasing power parity departures are not taken into
consideration, the cumulative impacts of some long run trends
tend to cause predictable deviations from purchasing power
parity for many economies. Choji and Sek (2017) associate this
trend with thepositive correlation between price levels and real
income per capita. In other words, a pound, when converted into
local currency such as Indian rupee at the current market
exchange rate performs better in poor nations than in rich ones.
Conclusion
Purchasing power parity theory, especially the absolute
one, holds that exchange rate between different currencies is the
same as their price ratios, as measured by reference commodity
basket prices. However, an analysis of tradable and non-
tradable goods invalidate the assertion that the same good
should cost the same in different countries if measured using a
common currency. This is attributed to various factors such as
demand and supply, government policies, and transportation
cost. Absolute purchasing power parity implies another version
of purchasing power parity theory, the relative purchasing
power parity, which asserts that percentage changes in exchange
rate is the same as the differences in inflation rates. Overall, the
relative purchasing power parity validates the notion that
exchange rate should equal price level after a given period of
time. Nonetheless, the theory can hold for only a given duration
because with time the exchange rate should be greater than the
purchasing power parity.
Reference List
Abbas Ali, D, Johari, F, & Haji Alias, M, 2014. ‘The effect of
exchange rate movements on trade balance: A chronological
theoretical review,’ Economics Research International, vol.
2014, pp. 1-8
AbuDalu, A & Ahmed, EM, 2013, ‘The long and short run
forcing variables of purchasing power parity of ASEAN-
5,’ E3 Journal of Business Management and Economics, vol. 4,
no.3, pp.66-81.

19. Al-Gasaymeh, A & Kasem, J, 2016, ‘Long-run purchasing
power parity and exchange rates: Evidence from the Middle
East,’ The International Journal of Business and Finance
Research, vol. 10, no. 2, pp.41-53.
Bahmani-Oskooee, M & Nasir, ABM, 2015, ‘Purchasing power
parity and the law of one price: Evidence from commodity
prices in Asian countries,’ Global Economy Journal, vol. 15, no.
2, pp.231-240.
Bastos, FDS, Ferreira, RT& Arruda, EF, 2018. ‘Speed of
reversion of deviations of the purchasing power parity for
Brazilian cities,’ Revista Brasileira de Economia, vol. 72, no.1,
pp.26-40.
Boyce, L, 2013, ‘The Ford Focus index: Buying and running a
car is cheaper in Britain than most other European countries,’
This is Money, 15 February, viewed 2 January 2020,
https://www.thisismoney.co.uk/money/cars/article-
2278601/Buying-running-Ford-Focus- CHEAPER-Britain-
European-countries.html
Çağlayan, M & Filiztekin, 2012,‘The law of one price and the
role of market structure,’ Munich Personal RePEc Archive,
no. 36975, 1-38.
Choji, NM & Sek, SK, 2017, Testing for the validity of
purchasing power parity theory both in the long-run and the
short-run for ASEAN-5. In AIP Conference Proceedings vol.
1905, no. 1 https://doi.org/10.1063/1.5012234Economist, 2019,
‘Burgernomics: The Big Mac index’, Economist, 10 July,
viewed 2 January 2020,
https://www.economist.com/news/2019/07/10/the-big-mac-index
Findreng, JH, 2014. ‘Relative purchasing power parity and the
European monetary union: Evidence from eastern Europe,’
Economics & Sociology, vol. 7, no 1, pp. 22-37.
Ghosh, J, 2018, ‘A note on estimating income inequality across
countries using PPP exchange rates,’ The Economic and Labour
Relations Review, vol. 29, no.1, pp.24-37.
Krugman, PR, Obstfeld, M, & Melitz, MJ, 2012. International
economics: Theory and policy, 9th ed, Pearson Education,

20. Boston, MA.
Lee, C, 2010, ‘Purchasing power parity and free trade area,’
Munich Personal RePEc Archive, no. 40431, 1-10.
Lee, HT, & Yoon, G, 2013, ‘Does purchasing power parity hold
sometimes? Regime switching in real exchange rates,’ Applied
Economics, vol. 45, no.16, pp.2279-2294.
Liang, BC. 2013. The pragmatic MBA for scientific and
technical executives, Academic Press, Cambridge, MA.
Paul, MT, Kimata, JD, Khan, MGM, & Campus, L 2017,
‘Purchasing power parity theory and applications for
Solomon Islands,’ Journal of Economics and Public Finance,
vol. 3, no. 4, pp. 507-530
Pilbeam, K, 2013. International finance, 4th ed, Red Globe
Press, New York, NY.
Rose, PS, Marquis, MH & Lu, J, 2012. Money and capital
markets 10th ed, McGraw- Hill, New York, NY.
Ryu, D & Ko, H, 2011, ‘Decomposition into tradables and
nontradables and the purchasing power parity (ppp)
hypothesis of the real won-dollar exchange rate. East Asian
Economic Review, vol. 15, no.3, pp.129-161.
Saadon, Y & Sussman, N, 2018. ‘Nominal exchange rate
dynamics and monetary policy: Uncovered interest rate
parity and purchasing power parity revisited,’ CEPR Discussion
Paper No. DP13235, viewed 2 January 2020,
https://voxeu.org/article/uncovered-interest- rate-parity-and-
purchasing-power-parity-revisited
Taylor, MP & Sarno, 2004, ‘International real interest rate
differentials, purchasing power parity and the behaviour of
real exchange rates: The resolution of a
conundrum,’ International Journal of Finance & Economics,
vol. 9 no.1, pp.15-23.
Zhang, Z & Bian, Z, 2015, ‘Absolute purchasing power parity in
industrial countries,’ Munich Personal RePEc Archive, no.
72788, pp. 1-17.

21. Exchange Rate
US/INDIA Exchange Rate 39448 39479 39508
39539 39569 39600 39630 39661 39692
39722 39753 39783 39814 39845 39873
39904 39934 39965 39995 40026 40057
40087 40118 40148 40179 40210 40238
40269 40299 40330 40360 40391 40422
40452 40483 40513 40544 40575 40603
40634 40664 40695 40725 40756 40787
40817 40848 40878 40909 40940 40969
41000 41030 41061 41091 41122 41153
41183 41214 41244 41275 41306 41334
41365 41395 41426 41456 41487 41518
41548 41579 41609 41640 41671 41699
41730 41760 41791 41821 41852 41883
41913 41944 41974 42005 42036 42064
42095 42125 42156 42186 42217 42248
42278 42309 42339 42370 42401 42430
42461 42491 42522 42552 42583 42614
42644 42675 42705 42736 42767 42795
42826 42856 42887 42917 42948 42979
43009 43040 43070 43101 43132 43160
43191 43221 43252 43282 43313 43344
43374 43405 43435 39.267600000000002
39.673499999999997 40.145200000000003
39.966799999999999 42.001899999999999
42.763300000000001 42.7027 42.905700000000003
45.53 48.615499999999997 48.851700000000001

22. 48.513199999999998 48.6995 49.248399999999997
51.129100000000001 49.965499999999999 48.51
47.6736 48.362400000000001 48.242600000000003
48.292400000000001 46.6524 46.530500000000004
46.527299999999997 45.894399999999997
46.273200000000003 45.450899999999997
44.444000000000003 45.768999999999998
46.4983 46.761699999999998 46.460500000000003
45.872900000000001 44.353999999999999
44.9315 45.1 45.375 45.3795 44.914299999999997
44.301000000000002 44.9024 44.810899999999997
44.396000000000001 45.313499999999998
47.6905 49.201999999999998 50.6785
52.382399999999997 51.0015 49.181199999999997
50.363500000000002 51.69 54.331400000000002
55.942399999999999 55.424799999999998
55.493499999999997 54.35 53.099499999999999
54.784500000000001 54.646999999999998
54.228999999999999 53.807899999999997
54.422899999999998 54.323599999999999
54.984499999999997 58.383499999999998
59.760899999999999 62.810899999999997
63.648000000000003 61.605899999999998
62.517899999999997 61.811 62.105699999999999
62.164200000000001 60.947600000000001
60.346400000000003 59.284300000000002
59.736699999999999 60.095599999999997
60.873800000000003 60.897599999999997
61.366799999999998 61.6828 62.707099999999997
62.13 61.990499999999997 62.480499999999999
62.641399999999997 63.715000000000003
63.780900000000003 63.604500000000002
65.097099999999998 66.166700000000006
65.026200000000003 66.099999999999994
66.502300000000005 67.333200000000005
68.239500000000007 66.890900000000002

23. 66.421899999999994 66.889499999999998
67.265500000000003 67.158000000000001
66.903499999999994 66.713800000000006
66.741500000000002 67.639499999999998
67.805199999999999 68.047399999999996
66.9726 65.800899999999999 64.536000000000001
64.419499999999999 64.4482 64.424000000000007
63.968299999999999 64.477500000000006
65.035700000000006 64.843500000000006
64.244500000000002 63.645200000000003
64.430000000000007 65.045500000000004
65.672899999999998 67.510000000000005
67.790000000000006 68.686700000000002
69.631699999999995 72.277900000000002
73.560900000000004 71.738 70.833100000000002
PPP 39448 39479 39508 39539 39569
39600 39630 39661 39692 39722 39753
39783 39814 39845 39873 39904 39934
39965 39995 40026 40057 40087 40118
40148 40179 40210 40238 40269 40299
40330 40360 40391 40422 40452 40483
40513 40544 40575 40603 40634 40664
40695 40725 40756 40787 40817 40848
40878 40909 40940 40969 41000 41030
41061 41091 41122 41153 41183 41214
41244 41275 41306 41334 41365 41395
41426 41456 41487 41518 41548 41579
41609 41640 41671 41699 41730 41760
41791 41821 41852 41883 41913 41944
41974 42005 42036 42064 42095 42125
42156 42186 42217 42248 42278 42309
42339 42370 42401 42430 42461 42491
42522 42552 42583 42614 42644 42675
42705 42736 42767 42795 42826 42856
42887 42917 42948 42979 43009 43040
43070 43101 43132 43160 43191 43221

24. 43252 43282 43313 43344 43374 43405
43435 133.68058809022469 133.07570920747085
132.26968687416928 132.1075842764146
132.26162958187123 132.64018369193062
130.53940579129113 128.22499307969159
127.17061680033177 124.18486152932307
121.8063618750559 121.36662754767708
121.07125180833198 121.67333103614801
121.96920997096042 120.64337417043077
120.1906136290405 119.63842317476546
114.22284429066016 113.06570765639107
112.44233955783744 111.18638281254242
109.27819900401148 108.44026069771512
106.91298871754447 108.19774554385002
108.64203616507082 108.83073487835343
107.64864552288044 106.30741891546005
103.94041942877215 104.08392625296021
103.56266293080233 102.54585529723373
102.0253150706708 100.54333186550693
99.410185818252344 101.52042044093399
102.51035337322112 102.61578166950653
102.54717664305045 101.35335885230282
99.34071359182262 99.101176840964214
97.740211651684518 97.045985399304953
96.476864268502581 97.215947198228818
97.150565895095596 97.087973964373106
96.851928062639246 95.249017753968516
94.675413710578795 93.627576382928865
91.711304549027858 91.359807489552594
91.340648881237257 90.463602324444963
89.621973447965104 88.972485028461975
88.428041706772262 88.352698051498322
88.188234006243249 87.316934549704811
86.70509259436794 85.784417174880844
84.357480431745856 83.746222895156549
83.491336009822561 82.239687454050397

25. 81.396231726751182 82.751410123794486
83.760187939572688 83.716690482223527
83.903294810884233 83.136350850550059
82.742888165566541 82.22300685447442
80.233997173163687 79.78336449156356
79.843406964378701 79.642818144582776
79.21279328341663 78.763648752135836
78.084361657622296 78.733459799323853
78.89024030189988 78.433031238321234
78.221715445090993 77.593466336789945
77.008564813357339 76.608213426826879
75.913848176424594 75.033468822885098
74.597781977827083 74.6192417247576
74.742594958091885 75.364444274755627
75.406542076704241 74.925333202315244
74.134233216320567 73.840693954970163
72.931339536644614 73.52348965795511
73.966305670782219 73.792125487453688
73.94332791788959 74.505476832034091
75.213176938941047 75.44980642259641
75.236545930642393 74.914827310180414
74.709150523606922 74.242799159694158
72.88997075122451 73.108236291576631
73.495337522760835 72.937046452544621
72.685560829459376 73.150825756242099
73.03857357882687 73.625424701984031
73.791901056981672 73.827990236218795
73.878512102913717 73.487699871188738
71.051041059892256 71.090512920674868
71.173121886455434 71.062778990488994
70.824764976984767 70.833100000000002

26. Deviation 39448 39479 39508 39539 39569
39600 39630 39661 39692 39722 39753
39783 39814 39845 39873 39904 39934
39965 39995 40026 40057 40087 40118
40148 40179 40210 40238 40269 40299
40330 40360 40391 40422 40452 40483
40513 40544 40575 40603 40634 40664
40695 40725 40756 40787 40817 40848
40878 40909 40940 40969 41000 41030
41061 41091 41122 41153 41183 41214
41244 41275 41306 41334 41365 41395
41426 41456 41487 41518 41548 41579
41609 41640 41671 41699 41730 41760
41791 41821 41852 41883 41913 41944
41974 42005 42036 42064 42095 42125
42156 42186 42217 42248 42278 42309
42339 42370 42401 42430 42461 42491
42522 42552 42583 42614 42644 42675
42705 42736 42767 42795 42826 42856
42887 42917 42948 42979 43009 43040
43070 43101 43132 43160 43191 43221
43252 43282 43313 43344 43374 43405
43435 -94.412988090224687 -93.402209207470861
-92.124486874169278 -92.140784276414593 -
90.259729581871227 -89.876883691930644 -
87.836705791291138 -85.31929307969159 -
81.64061680033177 -75.569361529323075 -
72.954661875055905 -72.853427547677086 -
72.371751808331979 -72.424931036148024 -
70.840109970960413 -70.677874170430783 -
71.680613629040494 -71.964823174765456 -
65.860444290660155 -64.823107656391073 -
64.149939557837442 -64.533982812542405 -
62.747699004011466 -61.912960697715121 -
61.018588717544468 -61.924545543850016 -
63.191136165070823 -64.386734878353437 -

27. 61.879645522880431 -59.809118915460047 -
57.178719428772162 -57.623426252960208 -
57.689762930802331 -58.19185529723373 -
57.093815070670786 -55.443331865506927 -
54.035185818252344 -56.140920440933975 -
57.596053373221125 -58.31478166950653 -
57.644776643050449 -56.542458852302822 -
54.944713591822619 -53.787676840964217 -
50.049711651684518 -47.843985399304955 -
45.798364268502581 -44.833547198228821 -
46.149065895095596 -47.906773964373095 -
46.488428062639258 -43.559017753968519 -
40.344013710578793 -37.685176382928866 -
36.286504549027846 -35.866307489552597 -
36.99064888123727 -37.364102324444964 -
34.837473447965102 -34.325485028461976 -
34.199041706772263 -34.544798051498326 -
33.765334006243251 -32.993334549704812 -
31.720592594367943 -27.400917174880846 -
24.596580431745856 -20.935322895156553 -
19.843336009822558 -20.633787454050399 -
18.878331726751185 -20.940410123794486 -
21.654487939572704 -21.55249048222354 -
22.955694810884218 -22.789950850550056 -
23.458588165566553 -22.486306854474421 -
20.138397173163689 -18.909564491563572 -
18.94580696437869 -18.276018144582793 -
17.52999328341663 -16.056548752135853 -
15.954361657622293 -16.742959799323856 -
16.409740301899895 -15.791631238321223 -
14.50671544509099 -13.812566336789942 -
13.404064813357337 -11.511113426826881 -
9.747148176424588 -10.007268822885109 -
8.4977819778271027 -8.116941724757595 -
7.4093949580918945 -7.1249442747556202 -
8.5156420767042391 -8.5034332023152501 -

28. 7.2447332163205687 -6.5751939549701603 -
5.7733395366446132 -6.6199896579551165 -
7.2525056707822131 -7.0506254874536864 -
6.303827917889592 -6.700276832034092 -
7.1657769389410362 -8.4772064225964101 -
9.4356459306423943 -10.378827310180426 -
10.289650523606923 -9.794599159694144 -
8.4659707512245035 -9.1399362915766318 -
9.0178375227608285 -7.9013464525446153 -
7.8420608294593706 -8.9063257562420972 -
9.3933735788268677 -9.1954247019840238 -
8.7464010569816679 -8.1550902362188111 -
6.3685121029137122 -5.6976998711887319 -
2.3643410598922543 -1.4588129206748732
1.1047781135445547 2.4981210095110242
0.91323502301523263 0