ected real exchange rates tend to be normally distributed. However, this is not the same thing as saying that the real exchange rate is constant since it does vary with time. Which leads us to why the PPP hypothesis is difficult to substantiate even in the long run. Unfortunately for those who study them, economies are not static entity. Rather they grow, shrink and re-tool over time. For the real exchange rate to be constant and thus for PPP to hold, nothing but money stocks and the price levels can change. (Fritz). Since this is an extremely unrealistic proposition, some economist claim that the PPP may be right in theory but hardly descriptive of what actually happens in practice. Going even further, Fritz Machlup writes, "[t]he survival of the purchasing power parity theory in present-day discussions among international monetary economists is a sorry reflection of their critical judgement." However being a resilient bunch, academics have reassessed their models of PPP in an attempt to adjust the real exchange rate for factors that contribute to structural change in an economy. For example one could discount the variability in the real exchange rate using the Balassa-Samuelson effect which states that the real exchange rate will shift as a result of the differences in relative productivity of the traded goods sector(faria). In essence though these models serve only to test PPP for traded goods as opposed to PPP as a whole (Isard p66). Moreover, recent empirical result have not supported the Balassa-Samuelson effect, likely because in the long run, productivity differentials disappear due the dissemination of knowledge and the mobility of human and physical capital. Although this could strengthen the argument for PPP the same study also found that the real exchanges rates impacts the relative growth rates, which means that the real exchange rate is not neutral, which implies that PPP is false. Nevertheless, it is unlikely...
