The theory that, in the long run, exchange rates between currencies should adjust so that an identical basket of goods costs the same amount in each country once converted to a common currency. Swedish economist Gustav Cassel popularized the modern doctrine after the First World War, building on classical price-specie-flow reasoning, as a benchmark for setting appropriate post-war exchange rates; empirically, actual exchange rates diverge from purchasing power parity for long stretches, and it holds far better as a very-long-run tendency than as a short-run predictor.
Facts
FieldInternational Economics 2 Origin YearCassel's two founding 1916 Economic Journal papers; he introduced the exact phrase 'purchasing power parity' in a follow-up 1918 work setting post-war exchange-rate benchmarks. SignificanceBecause PPP exchange rates are more stable and less affected by tariffs than market rates, they are used for many international comparisons, including comparing countries' GDPs and other national income statistics. 3 Classification
Concept FormEmpirical Measure or Indicator 1 Connections
Associated With
PPP calculations were used as one benchmark, among others, for setting post-war exchange-rate parities under the Bretton Woods system.
Source The New Palgrave Dictionary of Economics
Associated With School
PPP is central to monetarist accounts of long-run exchange-rate determination.
Source Capitalism and FreedomMilton Friedman
Attributed To
Source History of Economic Thought Website: Gustav Cassel profile
Sources
1. Purchasing power parity (Wikipedia)
lead paragraph, sentence beginning: Purchasing power parity (PPP) is a measure of the price of s
Purchasing power parity (PPP) is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currencies.
Purchasing power parity
Purchasing power parity (PPP)
In Group: Trade and Payments Concepts, Lead
Purchasing power parity (PPP) is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currencies.
View the Source2. The New Palgrave Dictionary of Economics
Palgrave Macmillan- purchasing power parity
- Associated With: Bretton Woods Conference
3. Wikipedia
Wikimedia FoundationPurchasing power parity, History section
Gustav Cassel is often credited for developing the idea of PPP, especially in his two 1916 Economic Journal papers, both titled 'The Present Situation of the Foreign Exchanges'.
Purchasing power parity, Uses section
Because PPP exchange rates are more stable and are less affected by tariffs, they are used for many international comparisons, such as comparing countries' GDPs or other national income statistics.
View the Source Capitalism and Freedom
Milton Friedman, 1962Associated With School: Monetarist Economics
History of Economic Thought Website: Gustav Cassel profile
History of Economic Thought WebsiteAttributed To: Gustav Cassel, Profile pageQuote, Attributed To: Gustav Cassel, Profile page
Among his other contributions is the rudiments of a "purchasing power parity" theory of exchange rates (1921) and an "overconsumption" theory of the trade cycle (1918).
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