Definition of
purchasing power parity
theory linking exchange rate to purchasing power a theory that the exchange rate between two currencies is in equilibrium when the purchasing power of currency is the same in each country. If a basket of goods costs £100 in the United Kingdom and $150 for an equivalent in the United States, for equilibrium to exist, the exchange rate would be expected to be £1 = $1.50. If this were not the case, arbitrage would be expected to take place until equilibrium was restored.
Related definitions of "purchasing power parity"
- Abbr PPP
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