Re : PPPs and inflation|
The Purchasing-power-parity (PPP) between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country's currency will purchase the same volume of goods and services in the second country as it does in the first. In the WEO online database, it is expressed as local currency per U.S. dollar.
Givn this definition, there is a relationship between a country's PPP rate and its relative inflation rate. For simplicity, let us assume that we have country A and the U.S. If country A's prices rise relative to the U.S., country A's exports to the U.S. decrease and its imports from the U.S. increase, which in turn depresses country A's currency (i.e. U.S. dollar appreciates relative to country A's currency). What PPP tries to measure is this actual relationship, how two countries inflation differential affects the value of their currencies relative to each other. For example, if country A's prices increase by 8% and the U.S. prices increase by 3%, then country A's currency should, in theory, depreciate by approximately 5% to equalize the purchasing power of the U.S. In other words, you will need more of country A's currency to purchase the same goods in U.S. dollars.
Hope this helps.
|9/5/2008 3:21:29 PM