TESTING FOR ABSOLUTE PURCHASING POWER PARITY

Purchasing power parity (PPP) is an equilibrium condition equating the nominal exchange rate between two countries with the relative price o f an identical bundle of goods in each country. Previous time-series r esearchers use price indices to study PPP, so they test relative PPP. We use new data that measures price levels, so we test absolute PPP. P rice levels provide a test of absolute PPP because, unlike price indic es, price levels do not contain a base period in which the nominal exc hange rate equals the price ratio by construction. We find support for absolute PPP. Copyright (C) 1996 Elsevier Science Ltd