Purchasing power parity means that A)e_nom = P_For / P. B)P = P_For. C)P = e_nom / P_For. D)e_nom = mc².

Question

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Purchasing power parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. According to PPP, in the absence of transaction costs and other barriers, the exchange rate between two currencies should equal the ratio of the countries' price levels. Choice A correctly represents this concept, where $e$ is the nominal exchange rate, $P$ is the domestic price level, and $P_{For}$ is the foreign price level, implying $e = P / P_{For}$.

Purchasing Power Parity Means That