Purchasing power parity Purchasing power parity (PPP) is an economic theory and a technique used to determine the relative

value of currencies, estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency's purchasing power. It as s how much money would be needed to purchase the same goods and services in two countries, and uses that to calculate an implicit foreign exchange rate. !sing that """ rate, an amount of money thus has the same purchasing power in different countries. #mong other uses, """ rates facilitate international comparisons of income, as mar et exchange rates are often volatile, are affected by political and financial factors that do not lead to immediate changes in income and tend to systematically understate the standard of living in poor countries, due to the $alassa%&amuelson effect. Definition of 'Purchasing Power Parity - PPP' #n economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. 'he relative version of """ is calculated as(

)here( *&* represents exchange rate of currency + to currency , *"+* represents the cost of good *x* in currency + *",* represents the cost of good *x* in currency , Investopedia explains 'Purchasing Power Parity - PPP' In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. -or example, a chocolate bar that sells for ./+.01 in a .anadian city should cost !&/+.11 in a !.&. city when the exchange rate between .anada and the !.&. is +.01 !&23.24. ($oth chocolate bars cost !&/+.11.) What is the Mint Parity Theory of Rate of Exchange )hen the currencies of two countries are on metallic standard (gold or silver standard), rate of exchange between them is determined on the basis of parity of minorities between currencies of the two countries. 'hus, the theory explaining the determination of exchange between countries which are on the same metallic standard (say gold coin standard), is nown the 5int "arity 'heory of foreign exchange rate. $y mint parity is meant that the exchange rate is determined on a weight6to6weight basis of two currencies, allowances being made for the parity of the metallic content of the two currencies.' 'hus, the value of each coin (gold or silver) will depend upon the amount of metal (geld or silver) contained in the coin7 and it will freely circulate between the countries. -or instance, before )orld )ar I, 8ngland and #merica were simultaneously on a full6fledged gold standard. 'oday, however, the method of determining currency values in terms of gold content or m parity is obsolete for the obvious reasons that(

(i) none of the modern countries in the world is gold or metallic standard, (ii) free buying and selling of gold internationally is not permitted various governments. #s such it is not possible to fix par values in terms of gold content or mint parity, and (iii) most of the countries today are on paper standard or -iat currency system. !vervalued "urrency #dvantages 2ownward pressure on inflation i.e. imported goods will be cheaper 5ore imports can be bought 9igh value of currency forces domestic producers to improve their efficiency to be more competitive in the international mar et.

Disadvantages :vervalued currency will ma e exports uncompetitive in the international mar et which will hurt the export industries Imports are relatively cheaper to buy due to overvalued currency. .onsumers will go in for more imports which will damage to domestic industries

$ndervalued currency #dvantages If currency is undervalued, the exports will be cheaper and they will grow leading to greater e%ploy%ent in export industries !ndervalued currency will ma e imports expensive for consumers, they will divert to domestic goods and thus e%ploy%ent in do%estic industries will increase&

Disadvantages #s discussed earlier undervalued currency ma es imports expensive which also leads to I%ported inflation i&e& all the products using imported components3raw material will become expensive thus effecting the general price level. #'solute purchasing power parity and relative purchasing power parity )hat is the concept of "urchasing "ower "arity all about; "urchasing "ower "arity shows how the exchange rate of two currencies should reflect the purchasing power of the people in the two countries. 'his concept of "urchasing "ower "arity is based on the 'he <aw of :ne "rice. 'he <aw of :ne "rice basically means that all good must sell at the same price everywhere in the world. 'his does not ta e into account the transportation cost. )hat is the concept of #bsolute purchasing power parity;

#bsolute purchasing power parity says that the value of , currencies change in inverse proportion to the changes in the ratio of the price levels. -or example, an apple costs a dollar in .ountry =. 'he same apple costs , dollars in .ountry >. In this case, the currency exchange should reflect accordingly. 'hat means a dollar in .ountry = equals to , dollars in .ountry >. 'his exchange rate is based on the cost of the apple, and that is assuming that the cost of the apple is the same worldwide. )hat is the concept of relative purchasing power parity; &ince the absolute purchasing power parity ta es into the consideration the effect of inflation. &ince inflation erodes the value of money, relative purchasing power parity states that the country with the higher inflation rate is the wea er currency. 'he concept of relative purchasing power parity requires that the exchange rate of two currencies reflects the effect of inflation rate. 'his is measured over a period of time. #re #bsolute purchasing power parity and relative purchasing power parity wor able in real life; In real world, the forex mar et does not ta e into the consideration the purchasing power parity. 'he fact is that this is a theory which attempts to explain how the exchange rate should behave. 9owever, this concept cannot explain the actual behavior of the forex mar et. 'he problem is that the whole concept of purchasing power parity is based on unrealistic assumption( +. It assumes that consumption patterns are the same all over the world. It is unrealistic to expect that everyone loves apple and eats an apple a day. ,. It assumes that the bas et of goods and services in the ."I is the same in all countries. 'hat is completely unrealistic. 8veryone nows that certain food, such as rice, is a stable in some countries, and hardly consume by the population in other countries. ?. 4o transportation cost. )e are certainly not living in a world with no transportation cost. 8ating fish in seaside town is certainly cheaper than eating fish in a mountain resort. 'hat is why the concept of purchasing power parity is a theory that wor s only in a made6believe world. #'solute purchasing power parity .ommonly called a'solute purchasing power parity, this theory assumes that equilibrium in the exchange rate between two currencies will force their purchasing powers to be equal. 'his theory is li ely to hold well for commodities which are easily transportable between the two countries (such as gold, assuming this is freely transferable) but is li ely to be false for other goods and services which cannot easily be transported, because the transportation costs will distort the parity. Relative purchasing power parity

Relative purchasing power parity is an economic theory which predicts a relationship between the inflation rates of two countries over a specified period and the movement in the exchange rate between their two currencies over the same period. It is a dynamic version of the absolute """ theory 'he (angladesh Export Processing )one #uthority *(EP)#+ is an agency of the @overnment of $angladesh and is administered out of the "rime 5inister's :ffice. Its objective is to manage the various export processing Aones in $angladesh. $8"B# currently oversees the operations of eight export processing Aones (8"B). # ninth Aone is scheduled to open in the future. 'he @overnment provides numerous incentives for investors for opening factories in 8"Bs. -or example, new factories enjoy tax holidays for 0 years. #lso, labour unions and other activities that are often viewed detrimental to productivity, are banned inside the 8"Bs. The (oard of Invest%ent *(!I+ was established in +CDC by the Investment $oard #ct to encourage investment in private sector, to identify the hindrance of investment and provide necessary facilities and assistance in the establishment of industries. 'he wide range of services $:I provides include investment promotion and facilitation covering support, suggestion and aftercare support to the investors. 'he prime vision of $:I is to promote domestic and foreign investment as well to enhance international competitiveness of $angladesh and contribute to overall social and economic development of $angladesh.