Purchasing-power parity theory states that relative prices in any two countries determine the exchange rate between their currencies.

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Purchasing-power parity theory asserts that the exchange rate between two currencies is determined by the relative prices of goods and services in the two countries. If prices are higher in one country than the other, the currency of the country with higher prices will depreciate in value relative to the currency of the country with lower prices, as it would take more units of the former currency to purchase the same basket of goods as in the latter country. In this way, purchasing-power parity theory suggests that changes in relative prices should translate directly into movements in exchange rates.

Purchasing-Power Parity Theory States That Relative Prices in Any Two