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:

Modeling

A method of learning in which individuals ascertain how to act or perform by observing the behavior of others, also known as observational learning or social learning.

Linguistic-Relativity Hypothesis

The theory that the structure of a language influences its speakers' worldview or cognition.

Cognitive Limits

The boundaries or constraints on a person's mental abilities, such as memory capacity, attention span, and the ability to process information.

Serial Processing

The act of processing information in a sequential manner, one operation at a time.