Question 1
The theory of Purchasing power parity holds up well over the long run. The reason for this is because the prices of commodities are brought on throughout a long period of time. Therefore, when a certain currency inflate so do the prices, however, this may be affected by many different reasons. When the exchange rate is the same between a few select currencies then it can easily be allowed to buy a lot of commodities and bring it to another market whose currency is pegged to another major currency. However, the theory of Purchasing Power Parity tends to not hold up well over the short term. The reason for this being is that the exchange rate during a short period of time can be affected by recent events, ones that are quick to happen and no economists could have saw coming. Therefore, the Purchasing power parity cannot be accurate in such a short period of time as the real exchange rate can change. If this is also the case, it can also be argument for the long period of time. Since say “700 years” is an enormous pan of time data can be analyzed and major events can be studied for what tends to effect prices. Therefore, prices and the value of a currency can be sought after, analyzed and predicted for a longer stretch of time.
Question 2
The theory of purchasing power parity does holds better for countries with relatively high rates of inflation and underdeveloped capital markets because costs will be lower. Since the wages of the advanced countries will be higher so will the costs. However, the inflation of currency may depend on the stability of the country. However, since most of the stable countries cannot provide a lower cost of labor, prices for most commodities will be much higher. The inflation tends to be more stable in the advanced economies. Since the purchasing power parity of these economies will differ there can be a great difference in the cost. For example, since the currency fluctuates, the prices can vary. In the developing world where the currency inflates rapidly the salaries do not grow as fast and prices tend grow at a pace that is between the growth of the salaries and the inflating currency. This creates a disparity of cost, making things very cheap, except for the people that live there. This allows for the developed world whose currency is stable to buy food commodities in these poor countries. However the cost of luxurious commodities tends to much different since it tends to cost much more. The graphs in the articles show the difference of costs between the developed world and to those of the developing world. The difference can be astounding.
Question 3
What I have disagreed with in the article was the cost of products in the developing world as well as in the developed world. This defective theory can sometimes prove untrue since the cost may not only be based on the currency. The government plays a pivotal role in prices since they do not always look after their citizens and charge more or put a tax on products. However, the cost of transportation differs from country to country. The prices may be pegged from a countries currency. Also, I did not agree with the fact of the currencies the same when pegged at the same ratio to the same cost for the value of their currency. When stating if the cost to the citizens had not come up as higher than to those of the developed world, despite the fact that their value of the currency is much lower. It does not agree with the principles of the purchasing power parity.
