ABSTRACT
Purchasing power parity (PPP) theory states, essentially, that under liberalised international trade a basket of goods in one country should cost the same as a basket of goods in another country. If domestic prices rise in one country, then the exchange rate between that country and another should change so as to restore the price equality between the two baskets of goods. Exchange rates should, according to this theory, be determined purely by relative price movements. It is doubtful if this would happen even in the
currencies such as the yen and DM contributed to a decline in yields expressed in Singapore dollars of 6.7%. Airlines often report the adverse effect of foreign exchange movements
on profits, but rarely the converse. In order to explore the possible trading impact of marked exchange rate movements, a simplified example has been constructed. This assumes trading only in the local currency (£ sterling) and one foreign currency (US$), and treats airlines either as exporters or importers, depending on the currencies in which its operating revenues and expenses are incurred. For an international airline to be an exporter, the following is likely to
hold true:
• Its costs will be primarily in the local currency. • The majority of its revenues will be in foreign currency.
