Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is a theory in economics that states that the exchange rate between two currencies is equal to the ratio of the two countries’ price levels. According to the theory, when two countries have similar price levels, there will be no incentive for people to move money or goods between them, and as a result, their exchange rates should stay the same. In practice, this means that prices for a given basket of goods should be the same in different countries when converted into the same currency. This has many implications for international trade, since it implies that exchange rate fluctuations should not lead to changes in the competitiveness of exports between countries.