购买力平价理论的实用性.doc

Analyze the Applicability of the Purchasing Power Parity Theory The purchasing power parity theory was put forward by the Swedish economist Cassel in 1922. "The general inflation which has taken place during the war has lowered this purchasing power in all countries, though in a different degree, and the rates of exchange should accordingly be expected to deviate from their old parities in proportion to the inflation of each country. At every moment the real parity is represented by this quotient between the purchasing power of the money in the one country and the other. I propose to call this parity "purchasing power parity"(Cassel, 1918). In Cassel’s view, the price of the currency depends on the purchasing power of the goods. The ratio of purchasing power is called as purchasing power parity. Movements in exchange rates ultimately depend on changes in the ratio of price levels between the two countries. But at the same time to present ideas Cassel theory also pointed out the establishment of this theory must meet the some conditions: 1. The purchasing power per unit of currency is determined by the amount of money supply. In the case of a certain supply of goods, as the money supply is more, the purchasing power per unit of currency is lower. 2. The theory must meet the law of one price. It means under free trade conditions, every piece of merchandise on the world market regardless of where it would be sold the sale prices are the same (net of transport costs). The theory assumed that there were no barriers and transaction costs between the two countries’ trade. What’s more, market prices should change with changes in supply and demand. In summary, based on purchasing power parity theory, the exchange rate is the PPP’s unbiased estimator in a world economy fully open, fully trade and the market is fully effective. The main attraction of purchasing power parity theory lies in its inherent simplicity. Analyzing currency exchange issues from the perspective of the p