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Purchasing Power Parity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Purchasing Power Parity

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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  • December 23, 2020 at 1:40 pm #600657
    adarsh1997
    Participant
    • Topics: 646
    • Replies: 282
    • ☆☆☆☆

    Hello John,

    Regarding PPP, how can we keep the price relatively the same when we have different rate of inflation of both countries. In illustration 1, rates of inflation is 2% in the UK and 4% is US, I did watched the lectures but still unable to understand how do we maintain the same price.

    Thanks

    December 23, 2020 at 1:51 pm #600665
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    With floating exchange rates, then (in theory) the exchange rate will change each year so as to keep the prices equivalent. We don’t do anything – in theory it will happen automatically due to market forces.

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