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Contributions to Political Economy 2004 23(1):65-80; doi:10.1093/conpec/bzh004
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Contributions to Political Economy, Vol. 23, © Cambridge Political Economy Society 2004, all rights reserved

Article

THE PURCHASING POWER PARITY THEORY AND RICARDO’S THEORY OF VALUE

PABLO RUIZ-NÁPOLES

Universidad Nacional Autonoma de México

Abstract

In this paper the Purchasing Power Parity (PPP) theory and its criticisms are analysed. The majority of studies show that in most cases, the PPP indicator is not a good predictor for nominal exchange rate changes, nor a good indicator of relative competitiveness between countries. Instead, orthodox and non-orthodox economists use relative labour costs to represent real exchange rates. This has interesting implications for the currently accepted price determination theory. In turn, this also allows us to use a Ricardian model as developed by Pasinetti to calculate the ratio of real, vertically integrated unit labour costs between countries as a real exchange rate determination theory and as a sectoral relative competitiveness indicator as well.


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