Purchasing Power Parity is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currencies.
What is PPP in simple terms?
In their simplest form, PPPs are simply price relatives that show the ratio of the prices in national currencies of the same good or service in different countries. PPPs are also calculated for product groups and for each of the various levels of aggregation up to and including GDP.
How do you know if you have PPP?
Summary
- PPP explains the relationship between product price levels and exchange rates.
- If the exchange rate between two currencies is equal to the ratio of average price levels between two countries, then the absolute PPP holds.
