Investor Glossary-purchasing power parityInvestor Glossary-purchasing power parityInvestor Glossary-purchasing power parityInvestor Glossary-purchasing power parityInsightful stock market charts - Click here
investor
Categories    # 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

Purchasing Power Parity

The HTML to link to this page
 

Purchasing power parity calculates exchange rates in terms of how much goods a currency can buy. Here's how purchasing power parity works: Imagine two countries, Alphastan and Betastan, produce only widgets. A widget costs 1 alpha in Alphastan and 3 betas in Betastan. The current exchange rate is 1 alpha = 6 betas. Under purchasing power parity, the alpha is overvalued vis--vis the beta, because each alpha buys goods worth only 3 betas. Alphastanians conscious of purchasing power parity would rush to Betastan, get six betas for an alpha, buy two widgets (6 beta/3 beta per widget) per alpha, and rush home. Purchasing power parity would thus anticipate that the people in Alphastan would bid up the beta until an alpha bought only 3 beta. Since purchasing power parity computations require that the goods be the same in every country, the Economist magazine uses a McDonald's hamburger for its world index of purchasing power parity. While more sophisticated analyses use a bundle of goods to compute purchasing power parity, determining purchasing power parity for complex economies remains difficult.



Rate this purchasing power parity definition...

Learn about investing with the Investor Glossary Term of the Day


Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.


Popular Terms: implied volatility, EBITDA, minority interest, VIX, class C shares, 1035 exchange, real GDP, 401a, labor relations, per diem, required rate of return, reverse mortgage, stock market close, inflation, LIBOR, margin rate, 144a, debt service coverage, diluted share, in escrow, dividends payable, retained earnings, option premium, Key Rate Duration, quality assurance, FTSE, liquidity ratio, irrevocable trust, command economy, deferred revenue, wholly-owned subsidiary, cancelled check, covered put, average price per share, APR, Zero Cost Collar, 1031 exchange, current ratio, FICO score, balance sheet, annual return, stock split, deferred tax, ex-dividend date, phantom income, ex-dividend, open position, risk management, limit order


Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
Home | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
©2004-2016 Investor Glossary - All rights reserved - Terms of Use