Absolute PPP

Absolute Purchasing Power Parity (PPP) is a theory suggesting that the exchange rate between two currencies should equal the ratio of their price levels for identical goods and services. In practice, this means that if a basket of items costs $100 in one country and the equivalent in local currency costs the same when converted at the PPP rate, the currencies are at equilibrium. Absolute PPP assumes that over time, exchange rates adjust to eliminate price differences, ensuring consistent purchasing power across countries. It provides a way to compare currencies based on their real value relative to goods and services.