Explain the Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) relationship in detail.
Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) are two fundamental concepts in international economics and finance. They help to explain the relationship between exchange rates, inflation rates, and interest rates. Let's explore each concept in detail:
- Purchasing Power Parity (PPP):
Purchasing Power Parity (PPP) is an economic theory that suggests that in the long run, exchange rates between two countries should equalize the prices of a basket of goods and services. In other words, the exchange rate should be such that the same product has the same cost in different countries when measured in a common currency. PPP is based on the law of one price, which states that identical goods should have the same price in different markets ______ ________ ________ ______ __________ ____.
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