Purchasing power parity

The actual external value of a currency taking into account the different price levels in the respective country. – If a certain basket of goods now costs USD 100 in the USA, and the same basket of goods costs EUR 110 in the euro area at the same time, then the parity rate is EUR 1.10 for one USD. – In the long run, the exchange rate moves toward purchasing power parity unless other circumstances – such as natural disasters, political upheavals, corresponding expectations – inhibit this alignment. – See Balassa-Samuelson effect, monetary home, shocks, external, shocks, structural, exchange rate calculation. – Cf. Monthly Report of the Deutsche Bundesbank of June 2004, pp. 29 et seq., Monthly Report of the Deutsche Bundesbank of June 2007, pp. 45 et seq. (calculation; overview; literature references [bad language!]).

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