Custom «Purchase Power Parity» Essay Paper Sample

Purchase Power Parity

The term Purchasing Power Parity (PPP) is used to define the extent to which the cost of products varies in the third world countries form the developed ones. This concept of analysis started in the 16th century and was intended to have products sold at the same price in different countries (Yin-Wong, 2010 pp. 450). However, due to transaction expenses and exchange regulations, the cost of certain products in two different countries always varies in price if calculated according to the same currency.

It elaborates on the cost of various products and how much more money is spent when purchasing the same goods in diverse countries. The parity and disparity acquired is used to determine the rate of exchange in the stock market. The total purchasing power similarity rate allows the economic experts to ascertain if a certain amount of money has the same purchasing power in more than one country (Yin-Wong, 2010, p. 103).

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Consequently, this enables the economic experts to compare the national income with the global scale. The economy of a country is often influenced by political factors (Yin-Wong, 2010 pp. 25). The necessary changes in income do not produce the same effect on personal financial changes. This is mainly the cause of the poor living standards of the people in the third world countries.

This concept of comparing the purchasing power was a hypothesis raised by Balassa and Samuelson. This means that the deviation in the prices of products nationally and globally can be compared to the rate of inflation (Yin-Wong, 2010, p. 152). According to the Balassa–Samuelson’s theorem, inability to maintain single purchasing power parity globally has led to the long-term and short-term deviations. Results, provided by the World Bank in 2003, showed that disparities developed between the purchase power parity when the dollar and yuan were compared. As a result, such divergence affects the GDP per capita income nationally for most individuals.

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