What is Purchasing Power Parity?

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Purchasing Power Parity (PPP) is a theory that suggests that exchange rates between currencies should adjust to equalize the purchasing power of each currency.

PPP is used to compare the economic productivity and standards of living between countries.
It is based on the idea that in the long run, exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries.
PPP is often used to adjust economic statistics for differences in price levels between countries.
For example, if a Big Mac costs $4 in the US and 2 pounds in the UK, the PPP exchange rate would be 1 pound = $2, which is different from the market exchange rate.
PPP is not always accurate due to factors such as trade barriers, transportation costs, and non-tradable goods.

What is Purchasing Power Parity?

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