International travelers and expatriates have long known that currency exchange rates are not reliable indicators of purchasing power. For example, a traveler to France or Germany will notice that the dollar equivalent in Euros cannot buy as much as at home. Conversely, the traveler to China will note that the dollar equivalent in Yuan will buy more.
Economists have attempted to solve this problem by developing "purchasing power parities," which are used to estimate currency conversion rates that equalize values based upon prices (Note 1). This helps establish the real value of money in a particular place.
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Author: Wendell Cox
