Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is an economic theory and exchange rate mechanism that suggests that the exchange rate between two currencies should adjust to equalize the purchasing power of the currencies when comparing the prices of identical goods and services in different countries. PPP is based on the law of one price, which posits that in an efficient market, identical goods should have the same price when expressed in a common currency. PPP is used to compare living standards, inflation rates, and economic performance across countries.