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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 PPP is calculated as: S = P1 / P2, where “S” represents exchange rate of currency 1 to currency 2; P1 represents the cost of good X in currency; and P2 represents the cost of good X in currency 2.

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