"In 2019, there was an estimated $1,650 trillion in
foreign exchange market activity (Bank for International Settlements 2019, p.3).6 In that same
year, world trade in goods and services was $24.96 trillion (World Trade Organization 2020,
p.17). This is 1.5% of total currency market activity. Even allowing for multiple covering
transactions by various parties and multiplying this by a factor of five, it still yields a total of only
$124.8 trillion, or 7.5% of total foreign exchange volume. If we assumed that the appropriate
factor were ten, which seems very unlikely, this does not help markedly as it only gets us to 15%
of the market. In other words, purchasing power parity is an explanation of currency prices that is
based on something in the range of 1.5% to 15% of actual foreign exchange market activity.
Even supporters of purchasing power parity admit that it only holds in the long run – a
period of time they say is equivalent to years or even decades. The more likely answer is that it
does not hold at all. Because the factors that determine the demand for goods and services differ
significantly from those that drive financial capital flows, purchasing power parity cannot
possibly explain real-world currency movements."
Harvey, John. (2021). Modern Monetary Theory, the United Kingdom, and Pound Sterling. https://www.researchgate.net/publication/351764940_Modern_Mo...