Economics

Economics

Q1: How does Purchasing power parity (PPP) help in determining the exchange rate in small countries? What are the problems associated with this approach? How does time and inflation affect it? Provide example?

Purchasing power parity is a theory of exchange rate where the average costs of goods and services and exchange rate is determined among the countries. The exchange rate is influenced by the actions of exporters and importers, according to the theory. Transactions of the current account of a country affect the exchange rate value in the foreign exchange market. According to the purchasing power parity theory, with time the ...