Question
What is the core intuition behind purchasing power parity (PPP)?
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Answer
Exchange rates adjust so identical goods cost the same across countries.
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Question
Why can higher domestic inflation than foreign inflation make a country's exports less competitive in real terms?
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Answer
Its currency becomes overvalued in real terms, raising relative domestic prices.
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Question
What is the real exchange rate formula in words?
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Answer
Nominal exchange rate times foreign price level divided by domestic price level.
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Question
How does a real exchange rate differ from a nominal exchange rate?
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Answer
Real rate adjusts for relative price levels; nominal rate does not.
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