Purchasing Power Parity

Someone mind taking a moment to quickly break P.P.P down into a simpler defintion than the one the OCR book gives and give me some understanding how I use it in an essay, or the type of quesiton that might be asked involving P.P.P?

Reply 1

dan94adibi

14

Original post by DarkRoast

Someone mind taking a moment to quickly break P.P.P down into a simpler defintion than the one the OCR book gives and give me some understanding how I use it in an essay, or the type of quesiton that might be asked involving P.P.P?

Purchasing Power Parity is a very simple concept. We could use it for many kind of things but mainly to measure the standard of living by taking into account the effect of exchange rate.

Ok assume that the current is

£1=$2

If a basket of goods in UK costs £150 and the same basket of goods in USA costs $300 then we can say that PPP exists.

You may hear other terms such as GNP at PPP.

GNP or GDP per capita is the total GDP divide by total population....

Lets say GNP in UK is £30,000
and GNP in China is £11,000

This may not be a realistic measurement because imagine if the same basket of goods in UK is 2.5 times more expensive than the same basket of goods in China.

Therefore the GNP at PPP for China would be 11,000*2.5 = £27,500

Sounds more realistic now.

As for Edexcel you will never get a question directly on PPP. Its more like you applying it to your answer and gain good analysis marks. Not sure about OCR though.

Reply 2

DarkRoast

OP

1

Ah that was indeed helpful, thank you.

In OCR looking at past papers and questions it would appear that we need to just know it as a definition and the most basic concept, but I feel to have a true understanding of a text book definition it is important to totally undertand the concept and be able to apply it.

Much appreciated.

Reply 3

dan94adibi

14

Original post by DarkRoast

Ah that was indeed helpful, thank you.

In OCR looking at past papers and questions it would appear that we need to just know it as a definition and the most basic concept, but I feel to have a true understanding of a text book definition it is important to totally undertand the concept and be able to apply it.

Much appreciated.

Yh PPP is really a wide concept.

Also PPP theory says that the value of a currency will fall by the difference in the rate of inflation!

So assume that inflation is constant in the USA but it rising at 10% each year in UK. Then you can say that the value of sterling is falling by 10% agains the US dollar.

Again imagine
the £1 = $2 exchange rate.

Imagine in the UK a jean costs £200 and in the US its $400 right now PPP exists

but lets imagine that prices are increasing in the UK by 10% each year and in US its remaining constant.

In 5 years time a jean in uk would cost

200*(1.1)^5=322.101

lets make it 320 for simplicity.

With £1=$2
£320=$640
Now I can buy a jean from USA and save $240 and perhaps buy another shirt.
Therefore imports will begin to rise.

As imports begin rise I demand more $$$ and therefore the demand for $$$ increases and the supply for £££ increase and hence leads to a fall in the value of £££.

(edited 11 years ago)

Purchasing Power Parity

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