As long as trade across borders is unrestricted and exchange rates adjust freely, the purchasing power parity theory predicts that the exchange rate between two national currencies will adjust in the

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According to purchasing power parity theory, in the long run, exchange rates between two national currencies will adjust to reflect differences in the nations' price levels. This means that over time, the currency of a country with a higher price level will depreciate relative to the currency of a country with a lower price level. The theory assumes free trade along with the unrestricted movement of capital and goods across borders. In the short run, the exchange rate may be affected by the actions of arbitrageurs and speculators, but in the long run, the exchange rate will adjust to reflect the differences in price levels. Changes in governmental trade policies or military power do not directly affect exchange rates in the same way as differences in price levels.

As Long as Trade Across Borders Is Unrestricted and Exchange