Question

Under what circumstances can purchasing power parity be applied

Answer 1

To make a comparison of prices across countries that holds any type of meaning, a wide range of goods and services must be considered. The amount of data that must be collected and the complexity of drawing comparisons makes this process difficult. To facilitate this, the International Comparisons Program (ICP) was established in 1968 by the University of Pennsylvania and the United Nations. Purchasing power parities generated by the ICP are based on a worldwide price survey comparing the prices of hundreds of various goods. This data, in turn, helps international macroeconomists come up with estimates of global productivity and growth. 

Every three years, the World Bank constructs and releases a report comparing various countries in terms of PPP and U.S. dollars. Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) use weights based on PPP metrics to make predictions and recommend economic policy. These actions often impact financial markets in the short run. (For related reading, see: 

Some forex traders also use PPP to find potentially overvalued or undervalued currencies. Investors who hold stock or bonds of foreign companies may survey PPP figures to predict the impact of exchange-rate fluctuations on a country's econo