Purchasing Power Parity (PPP) Deviations: The case of Zimbabwe and it’s five neighbouring countries (1997 – 2016).

Mudavanhu, Tinashe

Economic decline in Zimbabwe has manifested in several ways, one of which is in the form of persistent trade deficits. This is not unique to Zimbabwe alone, with trade imbalances also extending to its neighbouring countries. The purpose of this study is to investigate whether PPP deviations can be used to manage bilateral trade balances in such a way that parties concerned benefit from the trade proportionally. The literature review analysed research done on the validity of PPP theory in developing and developed countries all over the world. Studies generally confirmed that the long-run PPP holds strong for developed countries and weak for developing countries. The study makes use of secondary yearly data from international financial institutions and employs unit root tests and the Engle Granger cointegration test to investigate the Purchasing Power Parity theory. In addition, Granger causality tests were also performed on the observed deviations and trade balances to find out if a relationship is present. It was noted that PPP theory does not hold between Zimbabwe and its neighbouring countries (Botswana, Namibia, Zambia, South Africa, and Mozambique). As such, PPP deviations cannot be used to improve bilateral trade balances between Zimbabwe and its trading partners.

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