I've normalised deflators for countries A and B. If the Price level of Country A/ Price level of country B = .291, does that mean that on average for every dollar a person in Country B spends, for the SAME thing in country A it only costs about .291?
S = P1 / P2 ; P1=Price at country A's currency for good X,
P2=Price at country B for the same good X and S is equal to the exchange rate of currency #1 and currency #2.
This formula measures the difference between the two countries’ rates of inflation and the cost of commodities will drive changes in the exchange rate between the two countries.
this relates the change in two countries’ inflation rates to the change in their exchange rate.
for every 1.00 dollar spent on the good X in country B, it takes .29 cents to obtain the same good X in in country A buying it with country A's currency.
So if S doesn't match the exchange rate between the two countries for good X then one of the country's currency's is devalued.
As countries with higher levels of inflation are likely to end up with their currencies devalued