Purchasing Power Parity Analysis
Paul Streeten defying Purchasing Power as: “The amount of goods and services bought by a unit of currency. It is therefore the reciprocal of a price index: when prices go up, purchasing power falls”. In addition, he establishes that Purchasing Power Parity (PPP) is the theory that exchange rates between currencies are determined, in equilibrium or in the long run, by the amount of goods and services that a currency can buy. If £1 in Britain buys what $1.50 buys in the United States, the equilibrium exchange rate would be £1 = $1.50”.
The theory was propounded by the Swedish economist Gustav Cassel (1866–1944) in 1916 when a system of free exchange rates prevailed. If the prices of tradable goods are lower in one country than in another, allowing for transport costs and tariffs, people buy these cheaper goods and sell them in the dearer country. In the cheaper country the prices of goods or the value of the exchange rate will rise. But......

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Title: Purchasing Power Parity Analysis
Approximate Word Count: 1412
Approximate Pages: 6 (250 words per double-spaced page)

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