The theory of international exchange that holds that exchange rates are set so that the price of similar goods in different countries is the same is the

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The purchasing power parity theory suggests that the exchange rate between two countries should be such that the price of a similar basket of goods is the same in both countries. This theory assumes that there are no transportation costs, tariffs, or trade barriers to hinder trade. Therefore, the purchasing power parity theory is associated with the idea of long-term equilibrium in exchange rates.

The Theory of International Exchange That Holds That Exchange Rates