In this article, LTG GoldRock will share with you the core point of purchasing power parity theory ~
The reason why the country needs foreign currency or foreigners, because their own currencies are because these two currencies have the purchasing power of goods in each issuer ;"First of all, the most basic basis"; the change in the exchange rate is also determined by the ratio of the currency purchasing power of the two countries, that is, the rise in the exchange rate is the result of the change of currency purchasing power.This theory is divided into two parts:
Absolute purchasing power parity : refers to the ratio of equilibrium exchange rate between the country's currency and foreign currency equal to the ratio between the country and the foreign currency purchasing power or the level of price .Absolute purchasing power parity believes that the value of the currency of a country and the demand for it are determined by the amount of goods and labor that the unit can buy in China, which is determined by its purchasing power, so the exchange rate between the two countries currency between the two countries isIt can be expressed as the ratio of the purchasing power of the two countries.The size of the purchasing power is reflected through the level of price.According to this relationship, the rise in prices in the country will mean the depreciation of the country's currency relative to foreign currencies.Relative to purchasing power parity make up for the absolute purchasing power and cheap aspects.Its main point can be simply expressed as: the exchange rate level of the two countries' currency will be adjusted accordingly according to the differences between the inflation rates of the two countries .It shows that the relative inflation between the two countries determines the equilibrium exchange rate between the two currencies.Overall, the purchasing power parity theory explains the foundation of the exchange rate more reasonably. Although it ignores the impact of other factors such as international capital flow , the doctrine is still affected by Western economists so farPay attention to the mathematical model widely used in the basic analysis in the prediction of exchange rate trends .
2.Relatively purchasing power parity : It refers to the relative changes between the currency purchasing power of different countries and the decisive factor of the exchange rate change .It is believed that the main factor of exchange rate changes is the relative changes of monetary purchasing power or prices between different countries; compared with the balanced exchange rate in a balanced period, the purchasing power ratio of the two countries changes.The exchange rate between currencies between the two countries must be adjusted.
Compared with purchasing power parity, the exchange rate changes within a period of time, and considering the inflation factors.After the end of the World War I in 1918, due to the non -cashless bank voucher during the war, the inflation and price increased, which prompted economists to correct the absolute purchasing power .They believe that the exchange rate should reflect the relative changes of the price level of the two countries , because the inflation will reduce the purchasing power of the currency in various countries to varying degrees.Therefore, when both currencies have inflation, their nominal exchange rate is equal to its past exchange rate multiplied by the inflation rate of the two countries .That is, the relative purchasing power parity illustrates the changes in the exchange rate during a certain period, that is, the ratio of the exchange rate of the two hours is equal to the ratio of the general price index of the two countries .
3. The relationship between absolute purchasing power and relative purchasing power
If absolute purchasing power is established, relatively purchasing power parity must be established, because the price index is the ratio of the absolute level of the price of the two hours. Conversely, if the procurement power is established, the absolute purchasing power is not necessarily established, for example, the basis and the basis and the basis and the basis and the basis and the basis and the basis and the base period andThe exchange rate of the reporting period is equivalent to one -half of the absolute purchasing power and affordable.
