... theories and the exchange rates since exchange rates are being influenced by several macroeconomic variables. Although interest rates always appear to be incorporated into the exchange rates, the pertain importance of individual macroeconomic variables tend to shift over time. The purchasing power parity approach to the exchange rates was, and continues to be a very influential way if thinking about the exchange rate. The PPP is derived from the very basic assumption that there exists a "law of one price" in the world. This assumption states that identical goods should be sold at identical prices, and it implies that exchange rates should adjust to compensate for price differentials across the global economy. The theory behind PPP is very attractive, but how good do this theory work. The neither evidence show that the PPP don't hold in the short, nor medium run and but only in the long run. There are ...

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