Purchasing Power Parity (PPP)
Purchasing Power Parity (PPP) is an economic theory that compares the relative value of currencies by measuring how much a basket of goods costs in different countries. It suggests that exchange rates should adjust so that identical goods have the same price when expressed in a common currency. For example, if a loaf of bread costs $2 in the U.S. and 1,000 yen in Japan, then according to PPP, the exchange rate should reflect that relationship. This concept helps economists understand cost of living differences and assess whether currencies are undervalued or overvalued.
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Purchasing Power Parity (PPP) is an economic theory that compares the relative value of currencies based on the amount of goods and services they can buy. It suggests that in the long run, exchange rates should adjust so that a basket of goods costs the same in different countries when priced in a common currency. For example, if a hamburger costs $5 in the U.S. and equivalent goods in another country cost 25 local units, then the exchange rate should reflect this balance, ensuring that purchasing power is equivalent across borders.