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International Parity Conditions

In: The Economics of Foreign Exchange and Global Finance

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  • Peijie Wang

    (Plymouth University)

Abstract

The idea of PPP can be traced back to the medieval times, though the theory is more formally contributed to Cassel (1918, 1922), developed during a period that endured noticeable inflation in the world for the first time and the inflation rate as well varied noticeably between major trading nations. Therefore, PPP has been associated with inflation and inflation differentials from the start, being thrust in to a theory by real world issues. Cassel (1918) states that “The rate of exchange between two countries is primarily determined by the quotient between the internal purchasing power against goods of the money of each country.”, and remarks that “The general inflation which has taken place during the war has lowered this purchasing power in all countries, though in a very different degree, and the rates of exchanges should accordingly be expected to deviate from their old parity in proportion to the inflation of each country.” A testimony is then reached: “At every moment the real parity between two countries is represented by this quotient between the purchasing power of the money in the one country and the other. I propose to call this parity ‘the purchasing power parity’.”

Suggested Citation

  • Peijie Wang, 2020. "International Parity Conditions," Springer Texts in Business and Economics, in: The Economics of Foreign Exchange and Global Finance, edition 3, chapter 3, pages 35-69, Springer.
    • Handle: RePEc:spr:sptchp:978-3-662-59271-7_3
    DOI: 10.1007/978-3-662-59271-7_3
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