Purchasing Power Parity

Purchasing Power Parity (PPP) is an economic theory that suggests that in the long run, exchange rates should adjust so that identical goods cost the same in different countries when priced in a common currency. Essentially, PPP helps compare living standards by measuring how much people can actually buy with their money in various countries. For example, if a loaf of bread costs $2 in the U.S. and the same loaf costs 4 euros in France, PPP implies that the exchange rate should be 2 dollars to 4 euros to maintain equivalent purchasing power.