Principles of Macroeconomics / Unit 13 MAC 1214 short lesson, about 20 seconds
Purchasing Power Parity
Captions available
The idea
Purchasing power parity is the exchange rate that would make a basket of traded goods cost the same in two countries. Arbitrage pushes market rates toward it, slowly and imperfectly, over many years.
In practice
It is a long-run anchor rather than a prediction of next month's rate.
Where people slip
It applies to goods that can be traded. Haircuts and rents do not travel.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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