Appendix II

Summary

When it diverged greatly from the text on page 80 above, the original article ‘The Theory of the Exchanges and “Purchasing Power Parity“’ concluded as follows:

Thus a tendency of these two measures of the value of a country's currency to move differently is a highly interesting symptom; but it is not possible to say, without a further examination of each special case, of what exactly it is significant. Let me illustrate these theories by a brief examination of the actual figures charted below.

The first of these charts, which deals with the value of sterling, illustrates the significance of the choice of a base period. The top line, which gives the purchasing power parity calculated with 1913 as base, remains steadily above the actual exchange, but the second line, which is the same thing calculated with August 1919 as base, displays a persevering tendency to come together with the actual exchange, the line of which it is very frequently crossing. If we could depend on an inductive argument, it would be tempting to conclude from this chart that the events of the war have depressed the equilibrium of the purchasing power parity of sterling as against the dollar by about 6 per cent, but that with this adjustment the theory has worked very well indeed for the past two and a half years.