Question

Describe the theory of PPP - purchasing power parity

Answer 1

Answer: The theory of purchasing power parity (PPP) states that the ratio of the exchange rate and the price levels between two different countries must be equivalent. This means that the exchange rates between the two nations is equivalent to the ratio of the purchasing power of their respective currencies. As per this concept two different currencies from two different nations are said to be in equilibrium or at par when a “basket of goods” has same price in both the countries by taking into account the exchange rates of currencies between two nations. .