Impact of trade on purchasing power parity in black market and official exchange rates

Abstract

In this study, the impact of trade on purchasing power parity was tested for a sample of Asian currencies using official and black market exchange rates. Cross exchange rates were used in order to directly compare prices between countries. The efficient markets version of PPP cannot be rejected for most trading country pairs using official exchange rates. For nontrading country pairs, PPP cannot be rejected using black market exchange rates. An implication of these results for future research is that the choice of exchange rates in PPP studies should be determined by trade or lack thereof between any two countries.