Despite its limitations, purchasing power parity is the best available standard for predicting where exchange rates are likely to settle.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is a theory that states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods and services in the two countries. This theory is based on the assumption that people will buy goods and services where they are cheapest, and that this will lead to the exchange rate adjusting until the prices of the goods and services are the same in both countries.

Despite Its Limitations, Purchasing Power Parity Is the Best Available