As a theory of exchange rate determination,Purchasing Power Parity is the observation that exchange rates reflect the differences between nominal interest rates in different countries.

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Purchasing Power Parity is not based on nominal interest rates, but rather on the relative prices of goods and services in different countries. It states that the exchange rate between two countries should equal the ratio of the two countries' price levels (i.e. the price of a basket of goods in one country compared to the price of the same basket of goods in the other country).

As a Theory of Exchange Rate Determination,Purchasing Power Parity Is