Economics, Econometrics and Finance
4 years ago

Purchasing Power Parity Theory Challenged: Real Exchange Rates Reveal True Competitiveness

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SSRN Electronic Journal
The Purchasing Power Parity Theory and Ricardo's Theory of Value
Pablo Ruiz-Nápoles

Paper Summary

The Purchasing Power Parity (PPP) theory is often not a good predictor of exchange rate changes or country competitiveness. Instead, economists use relative labor costs to determine real exchange rates. This leads to using a Ricardian model to calculate real exchange rates between countries and sectoral competitiveness.

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