Absolute Form of Purchasing Power Parity

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Absolute form of purchasing power parity

A theory that prices of products of two different countries should be equal when measured by a common currency. Also called the "law of one price."

A theory stating that the same good or service costs the same amount regardless of the currency in which it is measured. For instance, if 1 pound is equivalent to 2 dollars, and a widget costs 1 pound in England, then the absolute form of purchasing power parity would state that the same widget would cost 2 dollars in the United States. This concept is also called the law of one price. In securities, any deviations from the absolute form of purchasing power parity create opportunities for arbitrage (profiting from inefficiencies in prices). See also: Purchasing power parity, Currency pair.

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