MGEA06H3 Lecture Notes - Lecture 20: Exchange Rate, Gdp Deflator, Purchasing Power Parity

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MGEA06H3 Full Course Notes
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MGEA06H3 Full Course Notes
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This theory says (predicts) the real exchange rate is equal to one (unity or parity) in the long-run. = # of units of foreign real gdp you can buy per domestic unit of real gdp e = the nominal exchange rate. = # of units of foreign currency you can buy per domestic unit of currency. This theory says (predicts) the real exchange rate is constant in the long-run. Pe fp some constant (which may be 1, but need not be 1) Absolute ppp implies relative ppp (i. e. if absolute ppp holds then so does relative ppp since 1 is a constant). But the reverse is not necessarily true, relative. Ppp can hold while absolute ppp does not (i. e. when the real exchange rate is constant in the long-run but not equal to one). If the real exchange rate is constant then its percentage rate of change is zero.

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