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When might it be bad idea to use the ppp theory in this way

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Reference no: EM131162029

Large-scale wars typically bring a suspension of international trading and financial activity. Exchange rates loss much of their relevance under these conditions, but once the war is over governments wishing to fix exchange rates face problem of deciding what the new rates should be. The PPP theory has often been applied to this problem of postwar exchange rates realignment. Imagine that you are British Chancellor of the Exchequer and World War I has just ended. Explain how you would figure out the dollar/pound exchange rate implied by PPP. When might it be a bad idea to use the PPP theory in this way?

Reference no: EM131162029

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