Economics Dictionary of ArgumentsHome
| |||
|
| |||
| Purchasing Power Parity: Purchasing Power Parity (PPP) is an economic theory that suggests exchange rates between currencies should adjust so that identical goods or services cost the same in different countries when expressed in a common currency. PPP is used to compare the relative value of currencies and to measure economic performance across countries. See also Purchasing power, Exchange, Equilibrium, Market, Economy._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
| Author | Concept | Summary/Quotes | Sources |
|---|---|---|---|
|
Murray N. Rothbard on Purchasing Power Parity (PPP) - Dictionary of Arguments
Rothbard III 828 Purchasing power parity/Rothbard: What determines the exchange rate between two (or more) moneys? Two different kinds of money will exchange in a ratio corresponding to the ratio of the purchasing power of each in terms of all the other economic goods. >Near money/Rothbard, >Exchange rate. Near money/silver/gold: Thus, suppose that there are two coexisting moneys, gold and silver, and the purchasing power of gold is double that of silver, i.e., that the money price of every commodity is double in terrns of silver what it is in terms of gold. One ounce of gold will then tend to exchange for two ounces of silver; the exchange ratio of gold and silver will tend to be 1:2. If the rate at any time deviates from 1 :2, market forces will tend to re-establish the parity between the purchasing powers and the exchange rate between them. Def Purchasing Power Parity (PPP): This equilibrium exchange rate between two moneys is termed the purchasing power parity. Thus, suppose that the exchange rate between gold and silver is 1:3, three ounces of silver exchanging for one ounce of gold. At the same time, the purchasing power of an ounce of gold is twice that of silver. It will now pay people to sell commodities for gold, exchange the gold for silver, and then exchange the silver back into commodities, thereby making a clear arbitrage gain. Rothbard III 829 Arbitrage: Arbitrage gains tend to eliminate themselves and to bring about equilibrium. Arbitrage will restore the exchange rate between silver and gold to its purchasing power parity. The fact that holders of gold increase their demand for silver in order to profit by the arbitrage action will make silver more expensive in terms of gold and, conversely, gold cheaper in terms of silver. The exchange rate is driven in the direction of 1:2. Purchasing power: Furthermore, holders of commodities are increasingly demanding gold to take advantage of the arbitrage, and this raises the purchasing power of gold. In addition, holders of silver are buying more commodities to make the arbitrage profit, and this action Iowers the purchasing power of silver. Hence the ratio of the purchasing powers moves from 1 in the direction of 1:3. The process stops when the exchange rate is again at purchasing power parity, when arbitrage gains cease. Equilibrium: (…) in the long run, the movement in the purchasing powers will probably not be important in the equilibrating process. With the arbitrage gains over, demands will probably revert back to what they were formerly, and the original ratio of purchasing powers will be restored. In the above case, the equilibrium rate will likely remain at 1:2. Exchange rate: Thus, the exchange rate between any two moneys will tend to be at the purchasing power parity. Any deviation from the parity will tend to eliminate itself and re-establish the parity rate. This holds true for any moneys, including those used mainly in different geographical areas. Whether the exchanges of moneys occur between citizens of the same or different geographical areas makes no economic difference, except for the costs of transport._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
||
Authors A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Concepts A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
