The theory of purchasing power parity (PPP)

  In this article we will talk about the theory of Purchasing power parity Sounds complicated right? But it is not and you will see it as you analyze throughout this document, as we will explain it in detail. What is it for? How does it regulate? Where is it applicable? Where does its importance lie? And other things about her that we did not know and it is really important to know. So without further ado let's get started.

Its definition in the world economy is a form of change in which a type of currency transforms in another to in this way cover all the purchasing power of the two. By ending this difference in prices and their levels in the various countries. In a simpler way, it is who regulates that the same goods and services are found at the same price in all countries regardless of the variation of their currency and allows a comparison to be made between the different ways of living in each country.

WHAT IS THE THEORY OF PURCHASING POWER PARITY (PPP)?

The theory of purchasing power parity (PPP) is an indicator of the economy that helps us to contrast the standard of living of other countries against ours, obviously taking into account the gross domestic product of each country.

Whenever we make a comparison between the economic levels of several countries we resort to the comparison of their gross domestic products (GDP) since it is well known that the higher the gross domestic product in a country, the more wealth; But actually making this comparison will not tell us much about the economic moment experienced by that country since it will vary by the number of inhabitants that inhabit that country, a country with thousands of inhabitants will not be the same as another with thousands.

If we want to contrast gross domestic tax of the different countries it is necessary to do it in comparison to their type of currency since each country measures it that way.

In this way of seeing the indicator there will be no variant in the purchasing power parity of each country in particles, since the increase or decrease of its currency since people buy, receive salaries and other monetary activities with the currency of their country.

WHAT DOES THE PURCHASING POWER PARITY (PPP) THEORY REGULATE?

La purchasing power parity theory tells us that each type of currency exchange should be in a way that that type of currency represents the same purchasing power regardless of where in the world.

If with an amount of money you can buy a mobile phone in the United States, with that same amount you must also be able to access it in Spain, or in any other part of the world and how is this regulation achieved? This is where the International Arbitration Law which is in charge of taking care of international markets, it is in charge of observing and seeking that there is a balance between the costs of products worldwide and avoiding situations of items at very low cost because it will lead to people wanting to buy it very cheaply in a place and then sell them expensively in another country in order to have a monetary difference that will give them a profit.

HOW DO I KNOW THE APPLICATION OF THE PURCHASING POWER PARITY THEORY (PPP) REALLY?

For the Purchasing power parity It is not enforced, there are arbitrageurs who make their purchase and sale movements that generate an exchange rate which moves until it achieves stability in accordance with the law of parity.

Usually the purchasing power parity remains stabilized for compliance, but sometimes there are products that don't; but usually they are services that cannot be taken to another place such as the fee for taxi service, a haircut, etc. That although in one place they are much cheaper, they cannot be taken to another place to be sold more expensive.

Another example that there is are the cases that the product itself is cheap but the cost of transportation or transfer is too expensive and therefore it will not be a good idea to buy it cheap, take it very expensive to another country to end up selling it at the same price. found there or sometimes higher.

Comparing the lives of citizens of each country and if its type of currency is overvalued or not based on the US dollar that is supported by the theory of purchasing power parity explained in another way, the US dollar should be able to acquire the same in all countries of the world, if it cannot be done in the case of being overvalued the currency will be able to buy more things but if it is undervalued it will be possible to buy more goods.

This is not for the only thing that can help or serve us, it also helps us to see clearly how foreign trade is, since a overvalued currency leads to continued export of its products, but instead an undervalued currency helps imports.

The theory of purchasing power parity helps us to have a point of reference about what is happening in the currency of each country in the world.

In conclusion, the theory of purchasing power parity is the one that regulates the exchange rate that exists between which should be better. But the theory of purchasing power parity also helps in the gross domestic product comparison and it helps to compare it internationally, since the gross domestic product varies in each country since it is calculated based on its type of currency and changing it to the same currency and accommodating it to the form established by purchasing power parity is the This benefit allows us to more realistically compare the different gross domestic products of each country in the world.

La purchasing power parity theory helps us solve the unknown of what is the amount of money you must have to buy the same goods or services in another country in the world. Starting from that, a calculation must be made where the exchange rate that is needed will obviously intervene so that the total of that money can change a currency to another is to say from one currency to another and thus being able to buy the same items, resulting in knowing that both currencies have the same purchasing power.

Another way of understanding the theory of purchasing power parity is that compared to the present value and the necessary value so that the theory of purchasing power parity is identical to the percentage increase or decrease in the exchange rate.

The theory of purchasing power parity is currently one of the most appropriate and adequate ways to measure living standards in the world. This regulation clears the monetary mirage related to the variability of the different exchange rates, in this way it is possible to observe and analyze the increase or decrease of a certain currency will not make any change in the theory of purchasing power parity of each place, because the citizens of that country receive a salary and make their purchases with the currency of their nation. However, one of the problems that arise against when making the meters that are based on purchasing power parity is the problem of buy quality goods and services in various countries of the world.

It is international arbitration that is in charge, as we have said previously, of providing a guarantee that the law of purchasing power parity is complied with. That is, the international arbitration takes care of international markets in a meticulous way to be able to look for the diversity of prices among all the markets that allow cheaper purchases to be made and sell more expensively in another country; thus having a benefit and doing in that way that increases the efficiency of the markets and, in conclusion, making them more competitive in this way.

Now you know that there is a theory of purchasing power parity that regulates the prices of goods and services throughout the world so that there is an economic equilibrium that is of great benefit, since thus there can be a monetary equilibrium between nations regardless of their type. of currency and thus be more equitable when buying these goods and services.

We hope that this article has been to your liking, as well as that it has helped you to understand well and in detail the meaning of the purchasing power parity theory.