purchasing power parity
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Related to purchasing power parity: Relative purchasing power parity
Purchasing power parity
The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies.
Purchasing Power Parity
The theory stating that, in an efficient market, the exchange rate of two currencies results in equal purchasing power. That is, if one pound is worth two dollars, one pound in England should buy the same amount in goods and services that two dollars can buy in the United States. Fixed exchange rates, taxes, and other inefficiencies are thought to disrupt purchasing power parity. Some theorists believe the idea holds most true when comparing countries or regions with similar standards of living.