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Let $P$ denote the price in the home country, $E$ represent units of domestic currency used to buy one unit of foreign currency, and $P^{*}$ represent the price level in the foreign country. Now, PPP implies that: $$ P=EP^{*} $$ In other words, prices when expressed in the same currency are equalized across countries. Log-differentiate and take changes and ...


You have most of the explanation here - the only missing piece is that as the de facto reserve currency of the world, almost all global trade is conducted in US dollars. Typically what happens is that a buyer will convert local currency to \$USD, the \$USD will be exchanged in the transaction, and then the seller will convert that \$USD to their local ...


This is hard to define because in general in economics the definition of overvaluation of currency is very vague. In economics overvaluation or undervaluation would be a deviation from a person’s expectation of purchasing power parity (PPP) should be (see the textbook Money, Banking and Financial markets from Schoenholtz). So technically if you think that 1 ...


An overvalued exchange rate implies that a countries currency is too high for the state of the economy. An overvalued exchange rate means that the countries exports will be relatively expensive and imports cheaper. An overvalued exchange rate tends to depress domestic demand and encourage spending on imports. -Tejvan Pettinger

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