The specific significance in application is reflected in the following respects:
i. PPP is the indicator of forecasting financial crisis: An obvious feature of the 1997 financial crisis of Asia is that the real exchange rate was greatly overvalued. This is because these Asian countries impose a pegged exchange rate regime as well as an improper financial freedom policy. On the other hand, financial crisis can be forecasted if nominal exchange rate is substantially deviated from PPP, so this can be a reliable indicator (Kaminsky and Reinhart, 1998).
ii. PPP is the foundation of monetary union and nominal anchor approach: This is especially important for Asian and Latin American countries among which the benefits of establishment of monetary union are a concern (Berg, Borensztein and Mauro, 2002; Wyplosz, 2002). The general view is that while monetary union is based on different theories, historical experience shows that the real exchange rate will not maintain long-term stability. First, the impact on different countries is not the same. Secondly, the stage of development in different countries is not the same. So these differences will bring short-term and long-term real exchange rate fluctuations. Therefore, economists suggest, within the monetary union, not only exchange rate but also inflation target should be converged.
iii. PPP is the tool to compare development degree and difference between rich and poor at international level: The empirical test of PPP is not just a theoretical application, but also an application for international level of economic development. It provides a standard criterion for the comparison of national income. It plays an important role in assessing the income inequality of the world and the impacts of globalization (Milanovic, 2002). Studies have shown that the nominal exchange rate in developing countries has a significantly greater deviation from PPP than in developed countries, which is due to the government intervention and large trade barriers in the economy of developing countries, indicating that the PPP test is conducive to determine the development of the national market economy (Tang and Butiong, 1994).