Concepts
Purchasing Power Parity
Also Known As PPP
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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 1 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. 2 Cross-Tradition Connections
Associated With
PPP calculations were used as one benchmark, among others, for setting post-war exchange-rate parities under the Bretton Woods system.
Associated With School
PPP is central to monetarist accounts of long-run exchange-rate determination.
Sources
1. The New Palgrave Dictionary of Economics
Palgrave Macmillanpurchasing power parity
1. The New Palgrave Dictionary of Economics
Palgrave MacmillanAssociated With: Bretton Woods Conference
2. Wikipedia
Wikimedia FoundationPurchasing power parityQuote, Purchasing power parity
Purchasing power parity (PPP)
2. Wikipedia
Wikimedia FoundationPurchasing power parity, History sectionQuote, Purchasing 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'.
2. Wikipedia
Wikimedia FoundationPurchasing power parity, Uses sectionQuote, 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.
Capitalism and Freedom
Milton Friedman, 1962Associated With School: Monetarist Economics
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