kaupmáttarpar

Kaupmáttarpar refers to the concept of purchasing power parity in Icelandic economics. It is a theory suggesting that in the long run, exchange rates between two countries should move towards a rate that would equalize the prices of an identical basket of goods and services in each country. Essentially, if a good costs 100 Icelandic Króna (ISK) in Iceland, its equivalent in another currency, say US Dollars (USD), should be such that after conversion, the price is the same. This theory is based on the law of one price, which states that in competitive markets, identical goods should trade for the same price when expressed in the same currency.

The practical application of kaupmáttarpar is often observed in the long-term trends of exchange rates. However, in the short to medium term, numerous factors can cause deviations from strict purchasing power parity. These include trade barriers like tariffs and quotas, transportation costs, differences in taxes, and market imperfections. Furthermore, goods and services that are not easily traded internationally, such as housing or haircuts, are less likely to adhere to kaupmáttarpar. Despite these limitations, the concept remains a valuable tool for economists to understand and predict long-term exchange rate movements and to assess the relative cost of living between countries.