assignment - 1/9 Introduction International trade is...

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Discuss the theoretical perspectives of  PPP and empirical evidence in testing PPP. 1 / 9
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Introduction International trade is essential and important in the world’s economic activity, the purchasing power parity theory make a connecting for different countries when they get in the trade. This study aims to discuss the theoretical perspectives of purchasing power parity and empirical evidence in testing PPP. It needs to explore the effect of the ppp theory. The relevant data also need to be used to evaluate the ppp theory for one country against several countries. Literature review The purchasing-power parity doctrine has had its ebbs and flows over the years. Interest in the doctrine in the doctrine arose whenever existing exchanges rates were considered unrealistic and the search began for the elusive concept of equilibrium rates, it was first invoked-although in somewhat ambiguous terms- in the period of the Napoleonic wars(Haberler, 1961,pp.46-7) In recent years, people have investigated the ppp theory in variety of methods. In Robert Z. Aliber’s opinion, “the purchasing power parity theory is a statement about the commodity price level in one 2 / 9
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country, the world commodity price level, and the equilibrium exchange rate for the country’s currency- that rate at which the country is in payments equilibrium exchange rate is the ratio of the price of a representative market basket of domestic goods to the price of an identical market basket of world goods.”(1978, 26-27). He also suggests that “Purchasing power parity is the same as the Law of One price with an identical composite commodity. Whereas the Law if One price deals with individual commodities, purchasing power parity involves bundles of commodities, including non- traded goods and services as well as goods and services which are traded internationally.”(1978, 27) Peijie Wang suggests that “Purchasing power parity is a theory about exchange rate determination based on a plain idea that the two currencies involved in the calculation of exchange rate have the same purchasing power for the same good sold in the two countries.”
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