Glossary · Macro · Open economy

Purchasing power parity (PPP)

The idea that in the long run exchange rates settle where the same basket of goods costs the same in every country. If a burger costs 5 dollars in New York and 4 euros in Paris, PPP says the rate should head toward 0.8 euros per dollar. It works better over decades than over months.

Also called: PPP, law of one price

Taught in: Trade & Exchange Rates

Related terms

Real exchange rate Exchange rate

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