What is Purchasing power parity
Purchasing power parity (PPP) is an economic theory that states that the exchange rate between two currencies should, in the long run, equalize the purchasing power of those currencies in each country. It suggests that the value of a good or service should be the same in different countries when measured in a common currency, taking into account the relative cost of living and inflation rates.
In simple terms, PPP takes into consideration the fact that prices of goods and services can vary across countries, and therefore, the exchange rate should adjust to reflect these differences. For example, if a product is cheaper in Country A compared to Country B, then the exchange rate should be adjusted to reflect this difference so that the purchasing power of the two currencies is equalized.
PPP is often used as a benchmark to compare the standard of living and economic performance of different countries. It is also used in international trade to assess the competitiveness of a country's exports and imports by considering the relative purchasing power of its currency. However, PPP is a theoretical concept and in practice, exchange rates are influenced by a wide range of factors, including market forces and government interventions.