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Forex market moving factor / Purchasing power parity

Purchasing power parity

There are the various theories to decide the forex rates, but the most representative one is based on the purchasing power parity, which was called by Mr. Cassel who insisted the proportion of purchasing power between two nations should decide the forex rate. The purchasing power stands for the value of the currency how much to get goods and services. It is needless to say that the value of the currency is easily affected by the inflation, and then, the purchasing power parity means the value of the currency in comparison to prices of commodities between two nations.

While the forex rates in the market is affected by supply and demand, the purchasing power parity is said to be based on the simple comparison in accordance with the real economy.

There remains some demerits. The purchasing power parity has no benchmark in comparing prices, then, it results in some minor gaps to calculate the purchasing power parity between using the consumer price index and the export prices.

Big-Mac parity

In the forex market, the price of Big-Mac hamburger is often focused about the purchasing power parity. It is broadly sold in the world and it make us easily compare the power of currency. This is so called, the Big-Mac parity. This parity might be very useful to compare the values because the hamburger includes all factors, so, materials, labor and distribution costs.

 
 

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