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Its definition in the global economy is a form of change in which a type of currency transformations in another to thus cover all the purchasing power of the two. By ending this difference in prices and their levels in the different countries. In a simpler way, it is who regulates that the same goods and services are at the same price in all countries regardless of the variation of their currency and makes it possible to make a comparison between the different ways of life in each country.
WHAT IS THE THEORY OF PURCHASING POWER PARITY (PPP)?
The theory of purchasing power parity (PPP) is an indicator of the economy This helps us to contrast the standard of living in other countries with ours, obviously taking into account the gross domestic product of each country.
As long as we make a comparison between economic levels of several countries we resort to the comparison of their gross domestic products (GDP) since it is well known that the higher the gross domestic product of a country, the more wealth; But in fact making this comparison will not tell us much about the economic moment that that country is experiencing since it will vary by the number of inhabitants that inhabit that country, a country with hundreds of inhabitants will not be the same as another with hundreds.
If we intend to contrast gross internal tax of the different countries it is necessary to do it in comparison with their type of currency since each country measures it that way.
From this dynamic of seeing the indicator there will be no variant in the purchasing power parity of each country in particles, from the increase or decrease of its currency since people buy, receive salaries and other monetary activities with the currency of their country.
WHAT DOES THE PURCHASING POWER PARITY (APP) THEORY REGULATE?
The purchasing power parity theory tells us that each type of currency exchange must be in such a way that that type of currency represents the same purchasing power no matter where in the world.
If with an amount of money you can buy a mobile phone in the United States, with that same amount you must also be able to enter it in Spain, or in any other part of the world and how is this regulation achieved? This is where the International Arbitration Law que se ocupa de cuidar los mercados internacionales, se ocupa de observar y buscar que exista un equilibrio entre los costos de los productos en todo el mundo y evitar situaciones de posts a muy bajo costo debido a que conducirá a que las persons quieran comprarlo muy barato en un lugar y después venderlos caro en otro país para tener una diferencia monetaria que les dé una ganancia.
HOW DO I KNOW THE REAL APPLICATION OF THE PURCHASING POWER PARITY THEORY (PPP)?
In the event that the Purchasing power parity It is not enforced, there are arbitrageurs who carry out their buying and selling movements that generates an exchange rate that moves until it reaches stability in accordance with the parity law.
Usually the purchasing power parity remains stabilized for compliance, but from time to time there are products that don't; but generally they are services that cannot be taken elsewhere such as the taxi service fee, a haircut, etc. That although in one place they are much cheaper, they cannot be taken to another place to sell them more expensively.
Another example that exists are cases in which the product itself is cheap but the cost of transport or transfer is too expensive and in this way it will not be a good idea to buy it cheap, take it very expensive to another country in conclusion selling it at the same price as it is there or sometimes higher.
Comparing the lives of citizens of each country and if its type of currency is overvalued or not based on the US dollar that is based on the theory of purchasing power parity explained in another way, the US dollar should be able to obtain the same in all countries of the world, if it cannot be done in the case of being overvalued, the currency will be able to buy more things but if it is undervalued it will be feasible to buy more goods.
This is not the only thing that can help or serve us, it also helps us to see clearly what foreign trade is like, since a The overvalued currency leads to the continuous export of its products., but instead an undervalued currency helps imports.
The theory of purchasing power parity helps us to have a point of reference about what is happening in the currency of each country in the world.
Finally, the theory of purchasing power parity is the one that regulates the exchange rate that exists between which should be better. But the theory of purchasing power parity also helps in the comparison of gross domestic product and it helps to compare it internationally, since the gross domestic product varies in each country since it is calculated based on its type of currency and changing it to the same currency and accommodating it to the form that defines purchasing power parity is the This benefit enables us makes it possible to compare in a more realistic way between the different gross domestic products of each country in the world.
The The theory of purchasing power parity helps us solve the unknown. of what is the amount of money you must have to buy the same goods or services in another country in the world. From there, a calculation has to be made where the exchange rate that is required will obviously intervene so that the total of that money can change a currency to another said in another way from one currency to another and thus be able to buy the same posts, resulting in knowing that both currencies have the same purchasing power.
Another way to understand the theory of Purchasing power parity is the one that is compared with the present value and the necessary value so that the theory of purchasing power parity is identical to the percentage increase or decrease in the exchange rate.
The theory of purchasing power parity is at the moment one of the most appropriate and adequate ways of measuring the world's standard of living. This regulation clarifies the monetary mirage related to the variability of the different exchange rates, in this way it is feasible to observe and analyze the increase or decrease of a certain currency will not make any change in the theory of purchasing power parity of each place, since the citizens of that country they receive a salary and make their purchases with the currency of their nation. In spite of everything, one of the problems that arise when making accountants that focus on purchasing power parity is the buy quality goods and services in various countries of the world.
It is the international arbitration that deals, as we have previously mentioned, with granting a guarantee that the purchasing power parity law is reached. That's the international arbitration handles international markets in a meticulous way to be able to look for the diversity of prices between all the markets that make it possible to make cheaper purchases and sell more expensive in another country; thus having a profit and doing it that way that increases the efficiency of the markets and ultimately makes them more competitive in this way.
Now you know that there is a theory of purchasing power parity that regulates the prices of goods and services worldwide so that there is an economic equilibrium that is of great benefit because thus there can be a monetary equilibrium between nations regardless of their type. . of currency and thus be more equitable when buying these goods and services.
We hope that this post has been to your liking, as well as that it has helped you understand well and in detail the meaning of the purchasing power parity theory.
