Trade & Open Economy · intro
What moves on the Purchasing Power Parity diagram
In the long run the exchange rateexchange rateThe price of one currency in terms of another. offsets relative inflationinflationA sustained rise in the overall price level, eroding money's purchasing power.: e moves with P/P*, relative PPP.
PPP anchors the exchange rateexchange rateThe price of one currency in terms of another. to relative prices.
Domestic prices surge 25% while the world's stay put.
The currency depreciates one-for-one along the PPP line. Inflate faster than your neighbors, and your currency pays.
Examiners ask this as: inflation currency depreciation ppp, price level exchange.
Other scenarios on Purchasing Power Parity