Question

Do you think that Purchasing Power Parity and Long Term Exchange Rate risk account for things in the countries' market such as changes in taste?

Answer 1

Purchasing power parity is the capacity to purchase the goods and services. It not only demonstrates the desire to purchase but also along with desire there shall also be the purchasing power or capacity to purchase the items.

Long term exchange rate to purchase any goods and services is essential for imported goods and services.

If the tastes of consumers change toward a good, then that will definitely affect the purchasing power parity of that good. Purchasing power parity implies not only the purchasing power to buy a particular good but also its desire to but that good.

In case if change in taste of the consumers the long term exchange rate will not get affected. Not buying a good will decrease it's value in the market, but the exchange rate takes place between two countries. Long term exchange rate takes place between two currencies. So, change in taste will not affect the long term exchange rate.