The purchasing-power-parity theory holds that exchange rates equate the purchasing power of various currencies.

Question

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The theory of purchasing power parity (PPP) posits that in the long run, exchange rates between two countries should equal the ratio of the two countries' price levels. This means that if the price level in one country is higher than in another, the exchange rate should adjust so that a given amount of currency buys the same amount of goods in both countries. In other words, PPP suggests that exchange rates should reflect the relative purchasing power of different currencies.

The Purchasing-Power-Parity Theory Holds That Exchange Rates Equate the Purchasing