The article by Kenneth Rogoff explores the puzzle of purchasing power parity (PPP), which posits that national price levels should be equal when converted to a common currency. While PPP is widely accepted as a long-run anchor for real exchange rates, short-term deviations from PPP are large and volatile. Rogoff discusses the empirical evidence on PPP, highlighting the failure of the law of one price (LOP) and the slow convergence to PPP. He reviews various variants of PPP, including absolute and relative PPP, and examines the impact of factors such as transportation costs, tariffs, and non-tariff barriers. Rogoff also discusses the Balassa-Samuelson effect, which suggests that rich countries tend to have higher price levels due to higher productivity in the traded goods sector. He reviews empirical evidence supporting this hypothesis, particularly for Japan. Additionally, Rogoff considers the role of current account deficits and government spending in influencing real exchange rates. Overall, the article provides a comprehensive overview of the challenges and recent developments in understanding PPP and its implications for exchange rate dynamics.The article by Kenneth Rogoff explores the puzzle of purchasing power parity (PPP), which posits that national price levels should be equal when converted to a common currency. While PPP is widely accepted as a long-run anchor for real exchange rates, short-term deviations from PPP are large and volatile. Rogoff discusses the empirical evidence on PPP, highlighting the failure of the law of one price (LOP) and the slow convergence to PPP. He reviews various variants of PPP, including absolute and relative PPP, and examines the impact of factors such as transportation costs, tariffs, and non-tariff barriers. Rogoff also discusses the Balassa-Samuelson effect, which suggests that rich countries tend to have higher price levels due to higher productivity in the traded goods sector. He reviews empirical evidence supporting this hypothesis, particularly for Japan. Additionally, Rogoff considers the role of current account deficits and government spending in influencing real exchange rates. Overall, the article provides a comprehensive overview of the challenges and recent developments in understanding PPP and its implications for exchange rate dynamics.