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.
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.