The academic theory for the study of Purchasing Power parity and money demand is standard. The convenient way of PPP theory proposes merchandise market arbitrage encourages parity in national price level. Therefore, changed to a general currency, national price levels supposed to be equal.
Law of One Price
The establishment of purchasing power parity is ashore in the law of one price. The theory tells the complicating factors and excluding frictional such as duty, excise, taxes and shipping costs; in our country the price of globally trade goods should attain the matching price in other country, formerly the price is in tune to a ordinary exchange.
And so, the economic theories propose to two long-run relationships can be originate: one between foreign prices, national prices and the nominal exchange rate; and further among national prices,, real income, money and the nominal interest rate. although we would be expecting together the real money demand and real exchange rate to be comparatively steady in the long run, we could also suppose momentary deviations as of these two long-run balance to have an effect on upcoming fluctuations in the variables so as to the long-run equilibrium are restore.
These conversion, in addition to a few essential economic structural modifications, might cover debatably affect in cooperation the real exchange rate and the long-run money demand relationship, as it lead to together a few financial intensifying (as low-income households gained access to formal banking services to a larger extent), and a well increase in foreign contest, which in turn might have had a rarity effect on the domestic price level.
Theoretically, PPP's are extremely related to CPI. The PPP's procedures of price level differences across liberty or, in their most popular form, across countries. As the prices of goods and services in various countries are articulated in national currencies, suppose the number of units of currency of two countries are A (or B), and consumers power of affordability between the two countries are B (or A) that has the same consumers affordability as one unit of currency of country A (or B). The different countries can assume special significance because the PPP's can be used conversion factor as a common currency unit in place of exchange rate because they assume special significance. However, the PPP's are similar to price index numbers in assessment. These ordinary currency units are measured to be real value aggregates. These real aggregates make it feasible to undertake economic and statistical analyses on global and regional levels and undertake cross-country comparisons.(责任编辑：BUG)