Purchasing Power Parity

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...the two countries should cost the same with the consideration of the exchange rate between two countries. An increase in a country's domestic price level or country experiences inflation implies that PPP will not be in equilibrium. Thus, "that country's exchange rate must depreciate in order to return to PPP" (University of British Columbia, ¶ 1).

The Outlook for 2008-09: Economic forecast (2008) stated that greater PPPs given to developing countries such as China imply that the economic growth in these countries will remain strong. However, in terms of market forces, when the U.S. experiences a decline in its growth, it reflects a slowdown in economic growth in developing countries. Thus, a decrease of 2.2% in the U.S. growth in 2007 to 0.8% in 2008 reflects the decrease in country like the Euro area with forecasted decline from 2.5% in 2007 to 1.5% in 2008. The Country Report of Switzerland also stated that global inflation is another factor that causes the price of ...