Understanding PPP Through Examples
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This chapter explains the calculation principle of PPP through the example of obtaining national GDPs. Specifically, the PPP method multiplies the relative prices by the domestic values of various commodities to obtain the GDP. This method is problematic due to the different commodities included in the samples, lack of clarity in relative prices, and the failure to meet the homogeneity requirement. The authors then examine the two perspectives regarding the purchase power of RMB, one suggesting that it is overestimated by the exchange rate between RMB and the US dollar, and the other suggesting it is underestimated. The authors indicate that since two conclusions are both drawn on statistic samples that do not meet the homogeneity requirement, they both can be biased.