ASSIGNMENT

Exchange Rate Determination in the Long Run – Data Evidence of the Theory of Purchasing Power Parity

Nowadays, most countries are involved in international trade, which requires them to convert their currencies into other countries’ currencies to make investments, and/or export or import goods. An essential task of economists in any country is the exchange rate determination (or prediction). Fluctuations in the exchange rate affect the prices many households pay to obtain foreign-made goods and services known as imports. For instance, in 2019, the total value of US exports in constant 2015 US dollars was 2.44 trillion dollars, and the total value of US imports was 3.12 trillion dollars .

How is the exchange rate determined?

What is the theory of the Purchasing Power Parity (PPP)?

What is the main prediction of the PPP?