Purchasing power parity is the ratio of the two currencies based on the cost of similar products in different countries.
can be assumed that a certain standard set of products in the US is $ 25, and in Russia 500 rubles.In this case, if we take the purchasing power parity, it is fair to say that when dividing 500 by 25, we obtain the rate of 20 rubles per $ 1.If different quotes in either direction from the merchants an opportunity to sell products in another country to obtain a certain profit.During the course, for example, 30 rubles per dollar, each unit of goods, you can earn 10 rubles.The result of this has to be one of two options: either comparing the prices of goods or change of the exchange rate.
To perform this economic model in practice required to comply with a number of conditions.For a start we're talking about the fact that the cost of moving goods from one country to another should be as small as possible: the absence of customs duties, the lowest possible cost of transportation, as well as many other options.Another prerequisite is a free currency conversion into each other, that is, it should be possible to exchange them against each other in any volume, while there should be no foreign exchange controls, regulation, or other obstacles.We can say that the ideal trading conditions - this is extremely rare, so there is no sense in practice to use the purchasing power parity, it is only a general guideline, that is the direction of change of quotations in the future.
hypothesis, which laid the basis for rate parity relates to the dynamics of the exchange rate change of the price ratios of the respective states.This whole theory is based on the fact that international trade helps to balance the difference in the price movement of the main types of goods in world trade.The cost of those in the different countries should be approximately the same, while it must be expressed in any one particular currency.It is obvious that such a leveling mechanism prices can not act on all goods and services.With all this at the theory of purchasing power parity has empirical support.It works, proving very useful in the analysis of exchange rates and prices in countries where there are relatively high rates of inflation.The hyperinflation has almost complete coincidence of domestic prices with the national currency.It is important to understand that the correlation of the dynamics of exchange rates and the ratio of inflation in different countries there are in the long term.
Purchasing power parity and theory based on it, does not find a sufficient amount of evidence in the short term, especially with respect to countries where inflation is low enough.Weighted average price ratio, which is calculated based on different commodity baskets in two countries over the years may not reflect the level of the exchange rate, as well as its dynamics.However, confirmation of this theory in the long term is sufficient to speak on such factors influencing exchange rates, as the country's trade balance, that is, the relationship of the trade balance and the dynamics of the course.
There is such a thing as the parity.It is related to the ratio between the two currencies, which is usually installed in the manner prescribed in the legislation.Earlier, this figure was based on the country's gold reserves, now in its foundation laid slightly different information.
If we talk about where to use these figures, we can say that they are very useful for the calculation of GDP at purchasing power parity.Thanks to him, you can more accurately compare the two economies of different countries.
