Empirical results of the PPP hypothesis have constantly shown that relative prices do not converge to the same level, neither in the short nor the long run. Therefore the PPP explanation of the determination of the real exchange rate is not operative to get a reasonable measure of competitiveness at the international level. In this paper, we put forth a different approach based on the works of Ricardo, Marx, Harrod, and Shaikh, which argues that the real relative unit labor cost is the main force that explains the long-run behavior of the real exchange rate.
Author: Francisco A. Martínez-Hernández
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