The Authors State That Empirical Tests of Purchasing Power Parity

question 39

Essay

The authors state that empirical tests of purchasing power parity "have, for the most part, not proved PPP to be accurate in predicting future exchange rates." The authors then state that PPP does hold up reasonably well in two situations. What are some reasons why PPP does not accurately predict future exchange rates, and under what conditions might we reasonably expect PPP to hold?

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Definitions:

Robert Livingston

An American lawyer, politician, and diplomat who served as one of the Founding Fathers of the United States, notable for helping to draft the Declaration of Independence.

Benjamin Franklin

Benjamin Franklin was one of the Founding Fathers of the United States, known for his contributions as an inventor, diplomat, writer, and statesman.

British Officials

Individuals holding office or positions of authority in the United Kingdom's government, including politicians, judges, and civil servants.

French and Indian War

A conflict between Britain and France from 1754 to 1763 in North America, part of a larger series of conflicts known as the Seven Years' War.