Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. Essentially, it is a measure used to compare the labour costs, national income levels, and the price level of two different countries. It is used to establish an international standard of comparison and evaluate worldwide economic stability. PPP helps in detecting economic trends, particularly to those countries whose currencies are not freely convertible. It is a principle that suggests the exchange rate between two countries should be equal to the ratio of the two countries' price level of a given set of goods and services. It is generally considered an alternative to the absolute exchange rate theory because it is not subject to speculative currency exchanges. The PPP theory is particularly useful for governments and international organizations as it allows for the comparison of different markets on an equal basis.