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The Purchasing Power Parity Theory And Ricardo'S Theory Of Value

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  • PABLO RUIZ-NÁPOLES

Abstract

In this paper the Purchasing Power Parity (PPP) theory and its criticisms are analysed. The majority of studies show that in most cases, the PPP indicator is not a good predictor for nominal exchange rate changes, nor a good indicator of relative competitiveness between countries. Instead, orthodox and non-orthodox economists use relative labour costs to represent real exchange rates. This has interesting implications for the currently accepted price determination theory. In turn, this also allows us to use a Ricardian model as developed by Pasinetti to calculate the ratio of real, vertically integrated unit labour costs between countries as a real exchange rate determination theory and as a sectoral relative competitiveness indicator as well. Copyright 2004, Oxford University Press.

Suggested Citation

  • Pablo Ruiz-Nápoles, 2004. "The Purchasing Power Parity Theory And Ricardo'S Theory Of Value," Contributions to Political Economy, Cambridge Political Economy Society, vol. 23(1), pages 65-80, November.
    • Handle: RePEc:oup:copoec:v:23:y:2004:i:1:p:65-80
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