Purchasing Power Parity - PPP

AAA

DEFINITION of 'Purchasing Power Parity - PPP'

An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.

The relative version of PPP is calculated as:

Purchasing Power Parity (PPP)



Where:
"S" represents exchange rate of currency 1 to currency 2
"P1" represents the cost of good "x" in currency 1
"P2" represents the cost of good "x" in currency 2

INVESTOPEDIA EXPLAINS 'Purchasing Power Parity - PPP'

In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency.

For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)

RELATED TERMS
  1. Purchasing Power Loss/Gain

    An increase or decrease in how much consumers can buy with a ...
  2. New York Dollar

    The buying power of a U.S. dollar in the city of New York. The ...
  3. Burgernomics

    An economics term made popular by the Big Mac Index published ...
  4. Law Of One Price

    The theory that the price of a given security, commodity or asset ...
  5. Starbucks Index

    A representation of purchasing power parity published by The ...
  6. Economics

    A social science that studies how individuals, governments, firms ...
Related Articles
  1. Economics Basics
    Economics

    Economics Basics

  2. Coping With Inflation Risk
    Bonds & Fixed Income

    Coping With Inflation Risk

  3. The Big Mac Index: Food For Thought
    Forex Education

    The Big Mac Index: Food For Thought

  4. Currency Exchange: Floating Rate Vs. ...
    Forex Education

    Currency Exchange: Floating Rate Vs. ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center