Existing literature reviews present PPP, but gives a very partial picture of how PPP are useful for understanding exchange rates. The role of the PPP in the case of exchange rate shocks are not discussed much. Exchange rate shocks are happening continuously. It is identified that in reality, the exchange rates are changing every second. This has a strong implication for individual and business ventures as well. Exchange rate shocks will create disturbance in inflation, the interest rates given out by banks and others.
Rate changes are normal, but rate shocks are such that a currency spike will be followed by another currency spike within a very short interval. There are both economic level implications and policy level implications when there is an exchange shock. An imperfect knowledge of economic theories such as the PPP could result in lessened understanding of price savings, relative prices maintenance, control of monetary shock drives and also non-monetary ones, etc. The use of PPP alone might not offer much in understanding exchange rate changes during the advent of an exchange rate shock. The use of PPP along with ICP would be helpful. ICP does help achieve price comparison according to most of the goods and services of the country. In fact, empirical evidence in the context of volatility of market prices shows that PPP generated by ICPs are useful in the case of price comparisons globally. Global price changes are reflections of local price drops or demand increases and vice versa. Therefore, participating countries in an ICP working on setting standard national average prices is useful. The countries participating in an ICP are around 147 and they are seen to convene to set average prices for around 1000 products (Callen, 2002).
The PPP is much better in understanding flow transitions where the exchange rate dependency on one country will have an impact on another. Economic data can be aggregated better across different countries. Where financial shocks are created acorns countries, countries would have to understand better what their price parity is with respect to other countries when the shock propagates. Only by understanding the flow of financial resources can the country prepare better and in this context, PP is useful. It will help in assessing the amount of funds that come into a country that goes out of a country and would be useful to understand financial resource changes over quick time periods as well. PPP would be useful when data has to be aggregated across many nations and national variables. It is helpful for calculating account discrepancies in a global outlook based on which the country could raise the value of its currency or lower it. Now while PPP is useful for handling sudden shocks in financial exchange rates, for all other decision making, the real GDP growth is more situated. Even here there are different approaches followed. For instance, the World Bank would make use of market based rates for weighing its regional and global GDP aggregations. On the other hand, the International monetary fund would make use of the weights based on PPP rates only.