Purchasing Power Parity

Discipline: Economics

With its roots in 17th century mercantilism, purchasing power parity was developed by Swedish economist Karl Gustav Cassel (1866-1945). It asserts that exchange rates are in equilibrium when the domestic purchasing power of currencies are the same.

A FFrlO = £1 rate would be in equilibrium if FFrlO bought the same quantity of goods and services in France as £1 bought in Britain. This is a useful concept when comparing international living standards.

Also see: fundamental disequilibrium, internal and external balance

G Cassel, "The Present Situation of the Foreign Exchanges - I', Economic Journal, vol. XXVI (March, 1916), 62-65


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