Abstract - Alastair J. Waithe

Purchasing Power Parity (henceforth PPP) is a core international finance principle. It has been viewed as a basis for international comparison of income and expenditures, an equilibrium condition, an efficient arbitrage condition in goods and assets markets, and a theory of exchange rate determination. Results of empirical analysis of PPP can have important implications in exchange rate policy. The concept of PPP has been the subject of numerous such studies but there is some disagreement on its validity. This paper investigates the existence of PPP by means of a US-China case study and a cross-country analysis of 79 countries across different continents with varying economic status. The results of the data analysis leads to the rejection of the PPP hypothesis under the US-China case study. In contrast, PPP is proven under the cross-country analysis. The failure to prove PPP under the former can have policy implications in light of the perceived undervaluation of the Chinese yuan relative to the US dollar.


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