The purchasing power parity and exchange‐rate economics half a century on

Abstract

The value of a country's currency is often considered as the most important price in the economy. Exchange‐rate changes can significantly affect the profitability of exporters, the prices paid by consumers, as well as complicating the comparison of the economies of different countries. In this article, we illustrate the workings of the purchasing power parity (PPP) and demonstrate its practical use with cross‐country data covering the 50 years since the collapse of the Bretton Woods monetary system. We find that despite the prolonged gyrations of currency values and the multitude of trade barriers, the forces of arbitrage and resource re‐allocation are sufficient to overcome many of these distortions in the longer term. We also provide a broad survey of other prominent themes, both extant and emerging, in international economics that highlight the importance of the relationship between exchange rates and prices.

Customer Satisfaction and Repurchase Intentions in Hotels During the Exchange Rate Change in Egypt: A Comparative Study Based on Demographic and Tripographic Attributes

“…Moreover, World Bank (2022) defined the PPP conversion factor as the number of units of a country's currency required to buy the same quantities of goods and services in the domestic market as a EGP would buy in the Egypt. According to Vo and Vo (2023), the theory PPP posited that exchange rates equalize prices of identical goods in different countries, if an exchange rate change causes price discrepancies, arbitrage occurs, leading to price adjustments or both. Moreover, Chen and He (2020) defined the Purchasing Power of Currency (PPC) as the quantity of goods and services purchasable with a financial unit.…”

Understanding International Price and Consumption Disparities

“…This is also known as the “Penn Effect” in homage to a group of pioneering economists at the University of Pennsylvania who initiated the first global PPP comparison via the United Nations' International Comparison Program (Kravis et al ., 1978, 1983; Summers and Heston, 1991). A recent review of the empirical validity of the HBS hypothesis and other prominent themes in exchange‐rate economics is provided by Vo and Vo (2022).…”

Revisiting Purchasing Power Parity in Emerging-7 Countries: A Powerful Unit Root Test

“…Although ppp makes important contributions to exchange rate determination theories, it has been criticized by many economists since it was introduced to the literature (Boundi-Chraki and Mateo Tomé, 2022;Vo and Vo, 2023). For example, Keynes (1923;1930) stated that the ppp hypothesis could be accepted as a "truism" and various transaction costs (transport charges, import and export taxes, and tariffs, etc.)…”