Purchasing Power Parity (PPP)
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- PPP theoretically links the movements in exchange rates between two countries to the changes in their currencies’ respective purchasing power.
- The Law of One Price – if there are no transportation costs, then an identical good should trade at an identical real price anywhere in the world.
- Absolute PPP – based on the law of one price, absolute PPP postulates that the spot exchange rate should reflect the price of one good compared to the other.
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