I'm doing a project and I'm asked to find Purchasing Power Parity exchange rate. The way the teacher says to do it is to divide my countries GDP deflator by the US GDP deflator over a time series. Is this how it's done. I'm a little confused...


I think the idea may be that if both deflators are normalised for a common base year, and the deflators are representations of the price level in the respective countries, then given then say:

If, in 2005, the GDP deflator for country A is 40.88, and in country B is 89.08. then 40.88/89.08 = 0.4589 => 1 of country A's goods is equal to .4589 country B's goods. Does this sound right?


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