ARE THE THEORY DE PARIEDAD GOOD PREDICTORES TO THE TYPE OF

EXCHANGE RATE?

By Maria Paula Rivera

The economic globalization, like integration process that spreads to create a single
international market, began after the Second World War, but it had its biggest peak in the
decades of eighty ninety due to the following factors: The Reduction of the commercial
barriers and the peak of the world trade, the Standardization of the goods and services, the
homogenization of the expenses, the Reduction of the geographical space for the
improvements in the telecommunications and transports, the collapse of the communist
world, the end of the cold war, the decrease of the paper of the state in the economy and the
growing privatization of the same one. (Enrique, G. R.)
In spite of a clear tendency toward the economic globalization, the national
structures of prices differ to each other in a considerable way. A closely integrated
international structure of prices doesn't still exist. In general terms one can say that, the
deviations of the parity of the purchasing power can be explained for: the barriers to the
trade, the costs of transport and the little dependability of the inflation calculations in
different countries.
The methodology to calculate the inflation is not perfectly standardized at
international level. Under the concept of many economists, the official methods used in
United States exaggerate the inflation, that is to say, the real inflation is smaller than the
one reported. In a country, as Colombia, it is affirmed that the official figures underestimate
the real inflation, not by reason of economic errors, technicians and technological, but for a
deliberate manipulation of the calculations with political and electoral ends. Likewise, the
representative baskets are different in each country and the proportion of the marketable
products of each one of them changes with the time. Generally, the basket according to the
country is slanted toward the products that take place and they consume in the same one,

however, given the world tendency toward the liberalization of the trade what will cause, is
a readjustment of the exchange rates and it will give a bigger accuracy in the theory of the
parity of the purchasing power.
The general idea of the parity in the purchasing power is that, a monetary unit
should be able to buy the same quantity of goods in a country that, the one that can buy an
equivalent quantity to that monetary unit in another country. In other words, it is looked for
to demonstrate that the consumption basket should have the same value in a country (in its
respective currency) as much as in another. As we have observed in the practice, this
doesn't usually happen, since there are many variables that intervene (from the salaries until
the different baskets that could be inclusive inside oneself country). For this they feel
indicative, having like base a standard product, which should have the same value
practically in all place in which you blindfolds. Having this, and comparing them in oneself
currency, we can estimate the difference in capacity of acquisition that exists among the
inhabitants average of a country. This explains the variations of the exchange rate among
currencies of two countries, in function of the variations of the levels of prices among the
same ones.
The law of the unique price settles down that, in the competitive markets, in those
that are not considered costs of transport neither official barriers exist to the trade (tariffs),
The Identical Products sold in different countries should have the same price, when this
comes expressed in terms of oneself currency. The unique price it refers to individual
products and the theory of the PPP considers the general level of prices. (Pondered prices of
the group of the products that are part of the reference basket). If, the law of the unique
price is completed in the individual thing, for each very considered then in the reference
basket the PPP it is completed. When the goods and services are temporarily more
expensive in a country that the other ones, the demand of its currency falls, The demand of
products diminishes, and both effects make that the exchange rate and the level of prices
return to the level in that the theory of the PPP is completed
The calculation of the levels of prices differs among countries. The individuals
distribute their entrance in a different way in each country. The theory of the PPP is relative
it makes predictions about the variations of the prices that it makes it is that it is completed

the margin of the index of the national level of prices or foreigner that it is chosen.
However the expense proportions in certain goods and in consequence the variations of the
relative prices can lead to non fulfillments of the theory PPP.

Reflection:
The PPP is more useful than the rate of the currency to know the level of prices and of life
that there is in a country, and it is also better to know the size of an economy, its
production. Also, it is much less sensitive to the short term variations that it can suffer a
currency for the international markets (devaluations, lost of trust, speculative attacks)

SOURCES
Enrique, G. R. (n.d.). La teoria de la paridad del poder adquisitivo. Retrieved from
http://www.webpondo.org/files/oct_dic/Teoria PPA.pdf

Balassa, B. (1964): The purchasing power parity doctrine: a reappraisal,

Journal of Political Economy, vol. 72, n 6, pp. 584-596.
http://www.kofl.li/kellermann/Uni%20Fribourg/VL%20Aussenwirtschaft%20I/HS
%202009/Balassa_1964.pdf

Kozikowski, Zbigniew. Finanzas Internacionales Mc Graw Hill Capitulo 10 El

Principio de la Pariedad y Poder de Compra .