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Business
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Number of pages / Number of words: |
11 / 3039 |
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If the actual spot rate was $1.80/? this would indicate that the pound is overvalued by 20%, or equivalently the dollar is undervalued by 16.7%.
[edit] Relative PPP
Purchasing power parity is often called absolute purchasing power parity to distinguish it from a related theory relative purchasing power parity, which predicts the relationship between the two countries' relative inflation rates and the change in the exchange rate of their currencies...
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This relation is necessary but not sufficient for absolute purchasing power parity.
According to this theory, the change in the exchange rate is determined by price level changes in both countries. For example, if prices in the United States rise by 3% and prices in the European Union rise by 1% the purchasing power of the USD should depreciate by 2% compared to the purchasing power of the EUR (equivalently the EUR will appreciate by about 2%)...
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