Purchasing Power Parity

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December 23, 2020 at 1:40 pm #600657
adarsh1997
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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
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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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