Swing Theory - Principles Of How You Can Use Technical Analysis Swing Charts To Your Trading Profit

Purchasing power parity is a basic principle that Forex Millennium governs exchange rates determination. According to it, the price of a good in one country should be equal the price of the same good in another country, be they exchanged at the current rate. This states the law of one price. Purchasing power parity comes in two versions: the absolute version and the relative one. In case of the former, the exchange rate is equal to the ratio of the two price levels from the two countries. The value of the ratio generally renders the weighted average of all goods produced in a country. Within this version, the transportation costs and trade barriers are considered insignificant, which is quite untrue. When speaking about the latter version, namely the relative one, it is established that the percentage change in the exchange rate from a given base is given by the difference between the percentage change in the domestic price level and the percentage change in the foreign price level. The downside of this version resides in the fact that it is difficult to define the base period and to compare the products taking into consideration price index weighting.

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