Definition

Purchasing Power Parity (PPP)

Purchasing power parity (PPP) theory, which attempts to quantify the inflation- exchange rate relationship.

It refers to the theory suggesting that exchange rates will adjust over time to reflect the differential in inflation rates in the two countries; in this way , the purchasing power of consumers when purchasing domestic goods will be the same as that when they purchase foreign goods.

In investopedia, "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."

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