Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is a macroeconomic theory that determines the long-run equilibrium exchange rate between two currencies by comparing the prices of an identical basket of goods and services in each country, essentially equating the buying power of both currencies. It is founded on the Law of One Price, which suggests that identical goods should cost the same in different markets when prices are expressed in a common currency, providing a benchmark for assessing currency overvaluation or undervaluation.